Islamic Finance (FN6023)
January 2010 Semester
Prof. Dr. Murat Cizakca
Topic:
Could Emerging Market Economies Lead The Way,
when The West seems to be entering another
Deflationary or Hyper-inflationary Depression?
Submitted by
Muhammed Syedul Hoque (ID: 0800856)
Enrolled in Ph.D.
April 17, 2010
1
Contents
Abstract ................................................................................................................................................ 3
Introduction ........................................................................................................................................ 4
Economic Growth Build on Mountains of Debt ...................................................................... 7
More Bad News on the Way ....................................................................................................... 18
Efficacy of Recent Bailouts ......................................................................................................... 19
History As Our Guide .................................................................................................................... 29
Could China Provide Economic Leadership? ........................................................................ 37
Could India Lead The Way Forward? ...................................................................................... 43
Growing Debt and Derivatives Problems .............................................................................. 44
First Things First – Reduce Government Debt? .................................................................. 51
Last Resort of Government‘s ..................................................................................................... 56
Prohibition of Riba .......................................................................................................................... 64
Could Islamic Banking Remedy Wealth and Income Inequity? .................................... 65
Conclusion ......................................................................................................................................... 66
Direct References ........................................................................................................................... 69
Indirect References ....................................................................................................................... 72
Appendix A – Economics: The Abysmal Science ................................................................ 74
Appendix B – Three Global Growth Scenarios .................................................................... 76
Appendix C – Trends Journal on US Economy and Politics ............................................ 78
Appendix D – Wealth Concentration amongst 1,011 billionaires ................................ 84
Appendix E – Stages of Deflation and K-Cycle ................................................................... 87
Appendix F – There is an Elite Cabal ...................................................................................... 89
Appendix G – Central Banks Stoking Market Euphoria ................................................... 91
Appendix H – Banking Cabal Gains from Financial Crises and Wars ......................... 99
Appendix I – Syed Hoque‘s Bio............................................................................................... 100
2
Abstract
Global economy had a great run-up in growth since the last severe recession in
the US in 1980-83, and need not look any farther than the raging equity markets
between 1982 and 2000. Subsequently, central banks lowered interest rates in unison to
40-year low to inflate more bubbles rather than allowing debt adjustments to take place.
This growth has taken place on the heels of massive credit expansion by consumers,
businesses and financial institutions, on the back of which the exporting nations have
latched their wagons. Now that this credit bubble has burst governments have begun to
expand their balance sheets to save the largest banks, as they have been providing the
grease that have been lubricating the global economy. East Asian countries have been
the most dependent on exports, and this dependence is coming on the heels of shrinking
consumer spending (alternatively, rising savings) in the face of rising interest rates due
to sovereign-debt crisis in many countries, and consequently higher debt-servicing
burden will be the result of this debt binge for consumers, businesses, financial
institutions and governments. In the face of these headwinds, it is questionable whether
emerging countries can grow out of this dilemma on their own. It is also questionable
whether Islamic Finance can add relief to an already indebted consumer situation
considering that over ninety percent of the financing tools used thus far have been credit
based. This paper explores these scenarios and attempts to present a realistic scenario
about the future of the global economy.
The following quote from late Professor Dr. Ludwig von Mises summarises the end
result of a boom brought about by credit expansion:
"There is no means of avoiding the final collapse of a boom brought about by
credit expansion. The alternative is only whether the crisis should come
sooner as the result of a voluntary abandonment of further credit expansion,
or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises
3
Introduction
"The significant problems we face cannot be solved at the same level of thinking we were
at when we created them." - Albert Einstein
The greatest credit bubble in history has burst, and applying the same old
remedies cannot get us out of the economic quagmire faced by the world.
This love
affair with unrestrained money supply, paper money, fractional reserve and ideology of
unregulated markets is best told with charts and table from many prominent and
contrarian/alternative sources.
Large trade and fiscal deficits that have been built up between the US (since
1984) and the Rest of the World (ROW) are beginning to be resolved but not without
financial turmoil.
The US has enjoyed the privilege of owning the world‘s reserve
currency, which was pegged to Gold at a rate of $35 per troy ounce (tr. oz.) after
President Franklin Delano Roosevelt devalues the US Dollar in 1933 from $20 per tr. oz.
to get the US out of the previous economic depression from which the US was not healed
until after WW II.
IMF was formed in 1944 (soon after the war ended) to stabilise the world
economies, and nations gathered in Bretton-Woods (New Hampshire, USA) to agree to
peg their currencies to the US Dollar for which they had to deposit certain amount of
Gold with the Federal Reserve of New York, which supposedly has custody of the Gold
until today.
This policy resulted in stable economic growth until the US entered the
Vietnam War and piled up public debt, in addition to rising trade deficits with other
countries. As the US government finances began to deteriorate President Nixon decided
to remove the Gold pegging of the dollar in order to be able to inflate their way out of
the recession, but people did not realise what that meant until a few years later when US
began to put its printing presses on high gear.
Several years after this gross violation of IMF terms with other countries,
investors realised the trick and began to bid up the gold price initially to US$160 per tr.
4
oz. and then finally up to US$850 per tr. oz. on Jan 21, 1980 (refer to Figure 1).
In
order to reign in the speculation in the market Fed Chairman Paul Volcker raised interest
rates to 21% which brought the gold price down around US$450-500 within a couple of
years. Chairman Volcker‘s interest rate action resulted in severe recession in the US. At
that time the US GDP was around US$1 trillion.
Since then interest rates have been
falling and the great market speculation began. The speculative mania did not just erupt
in the US Savings and Loans industry, which cost US tax-payers $150 billion.
The
bursting stock market bubble in 1987 as newly appointed Fed Chairman Alan Greenspan
got his first test of resilience, and used the same medicine of lowering rates after every
panic. This emboldened traders to take bigger and bigger risks/best knowing that the
person at the helm was too predictable in his treatment of asset bubbles.
Figure 1 – Gold Price from 1970 through November 2009 1
Chairman Greenspan spoke of irrational exuberance in December 1996 referring
to the mania taking place in the NASDAQ market which has risen from under 1,000 in
1995 to over 5,132 by March 2000.
Chairman Greenspan belatedly began raising
interest rates in the third quarter of 1999 and kept raising rates till 6.5% mid-200 if a
burst bubble would ever re-inflate.
1
www.Kitco.com
5
By the summer of 2002 the US economy was in doldrums, and Chairman
Greenspan began to aggressive slash interest rates, and lowered it to 1% by May 2004 –
a 42-year low.
In the meantime, the Glass-Steagall Act of 1934, which separated
banking, investment banking and insurance to be done under one umbrella, was
abolished by 1999 by Former Treasury Secretary Robert Rubin (who later became Group
Chairman of CitiGroup), Clinton Economic Advisor Dr. Larry Summers under the tutelage
of Fed Chairman Alan Greenspan in the name of freeing the markets from regulations.
The lax regulatory stage had already been set for what was to come in the investment
banking industry, that is, the debacle with debt, securitisation, derivatives, trade-cycling
of dollars that kept a lid on interest rates for a while.
Figure 2 – Interest Rate movement in US, UK, EU, Japan and China2
Falling interest rates over the past 20 years (Figure 3) and corporations using
capital markets to raise cash, banks began to lose even their retail investment business
to investment banking as money-centre banks could not offer attractive rates to their
depositors. Also, with every drop in interest rate US consumer began borrow short and
invest long looking for higher return to keep up with inflation to maintain their
extravagant lifestyle.
Sometimes even the elected and appointed officials proded
consumer to spend, as Fed Chairman Greenspan did in the summer of 2004 by
2
―Worst-case Debt Scenario‖, Client Report, Societe General, November 2009, p. 14
6
encouraging consumers to get into adjustable-rate mortgages just before he began to
raise rates.
Appendix A contains an article that summarises the misplaced faith that
monetarists and free-market ideologues had placed on efficient markets theory which
has brought the US, and consequently, the global economy to the brink of collapse. The
people who got us in this mess cannot be expected to solve the massive economic
problem as the quote above summarises so succinctly.
However, their misjudged
solution is to throw more fuel at the fire as if more of the same thing (debt and money)
thrown at the problem will resolve an already-aggravated debt situation.
What this
additional debt is doing is incubating the next crisis, that is, the government debt crisis,
which has already begun in Greece and Eastern Europe.
Figure 2 – 20-year Cycle of Effective US Fed Funds Rate3
Economic Growth Build on Mountains of Debt
Since the removal of the discipline of the gold-standard, US economy began to
grow with little attention to the debts it was accumulating in every sector - government,
consumers, business and financial institutions.
3
Shedlock, Michael (2005): K Cycle Trends
http://globaleconomicanalysis.blogspot.com/2005/07/great-flation-debate-whats-coming-and.html
7
Figure 3 depicts slow public debt-growth between 1945 and 1970 due to the
restraint of gold-standard on the elected officials, when deficits and debt could not grow
out of proportion to a nations stock of gold and money could not be created out of thin
air to inflate the economy. With the removal of the gold standard in August 1971
Keynes‘ advise on government to run budget deficit during recessionary times to put
money into pockets of people (via unemployment and other welfare benefits) was taken
to the extreme.
In 2009 this Keynsian thesis was taken to the extreme by the US government
when federal budget deficit shot up to $2 trillion (not reflected in Figure 3 as updated
chart could not be located). Instead of putting money into the consumer‘s pocket the
government stashed the coffers of bankers, and put US citizens on the hook for future
tax payments.
Figure 3 – US Debt Explosion Since 1970 (removal of Dollar-Gold Peg)4
4
US National Debt Clock: www.brillig.com/debt_clock/
8
As interest rates fell in the US (Table 1 below), consumers not only used up their
own savings to continue their lavish lifestyles but also borrowed to the hilt to maintain
that lifestyle with consumer debt growing from a little over $1 trillion in 1982 to over
$12.5 trillion debt by 2008 (Figure 4 below). Figure 5 illustrates the US consumer debtto-GDP ratio since 1929. Note that consumer debt-to-GDP ratio in 1929 (in the midst of
the Great Depression) was half (60%) of what it was in 2007 (120%).
Even without
having entered another depression the US consumer has accumulated twice that amount
(relative to US GDP) reflecting the important role that US consumers have played in
shoring up the global economy in the last 15 years. However, since 2007 this ratio has
been dropping as consumers retrench and build up their Balance Sheet and shore up
savings, but it is a bad omen the global economy when the best consumers in the world
are retrenching at a time when they are needed the most.
According to Dr. Stephen Roach 5 98% of global economic growth between 1995
and 2002 was provided by the US consumers. He also mentioned that as late as 2003
70% of US GDP was comprised of consumer spending, even though consumers had run
their savings into the ground.
Knut Wicksell‘s6 research indicates that for a healthy
economy consumer spending should be maintained between 62-64% of the GDP, with
government spending comprising 18-20% and corporation spending and investment 1618%.
Table 1 – US Interest Rates, Savings, and Household Debt Obligations 7
5
6
7
Year Loans
Past Due hit
5%
10-Yr UST Yield
(↓)
National Savings
Rate (↓)
Homeowner Financial
Obligations Ratio (↑)
1980
10.95%
10.57%
13.29%
1991
8.00%
7.06%
15.37%
2001
5.27%
1.40%
16.01%
2007
4.85%
-0.05%
18.07%
http://www.morganstanley.com/views/gef/index.html
Swedish Economist (1851-1926)
Source: http://www.financialsense.com/Market/wrapup.htm
9
Having exhausted their savings by 1998 (Figure 4), consumers resorted to debt
to keep up their profligate lifestyle as seen in Figure 5. Figure 6 (consumer debt-toGDP) illustrates the extent debt accumulation as consumer debt began to rise
exponentially beginning in 1998.
Figure 4 – US Consumer Savings Rates (1957-2009)8
Figure 5 – US Consumer Debt Outstanding (1940-2010)9
8
9
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 16
http://www.prudentbear.com/index.php/consumer-debt
10
Figure 6 – US Household Debt as a % of GDP10
Figure 7 – US Equity Withdrawal by US consumers (1986-2007)11
The additional borrowings came in the form of mortgage equity withdrawals
(MEWs), which had not exceeded $300 billion between 1986 and 1997 (shown in Figure
7). From 1998 onward these MEWs took on a greater meaning in the growth of the US
economy.
Figure 8 illustrates the contribution of MEWs to the US GDP between the
years 1996 and 2000 was minimal, which means that the economy was growing at a
10
11
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 16
www.prudentbear.com
11
natural pace with savings that had been accumulated in the previous recession in
1990-1994 (Figure 4). Between 2001 and 2005 (Figure 8) MEWs took on a prominent
role in the growth of the US GDP to the extent that there would have been no growth
without the MEWs.
In 2004 and 2005 MEW provided up to 3.5 – 4.0% of the GDP
growth. This is a significant growth considering that retail construction industry is just
one of many industries in the US.
Shadow Government Statistics (an independent analyst that uses statistics from
various sources to re-construct economic data based on old and honest methods)
shows us that even with such large infusion of debt into the US economy, there was
not much positive growth in the US economy after adjusted for inflation (Figure 9),
which he also computes to be much higher than government figures. In a later section
the
author
elaborates
on
the
motivation
of
the
US
government
for
under-
estimating/under-reporting the inflation figures.
Figure 8 – Contribution of Mortgage Equity to US GDP Growth 12
12
Long, Gordon T. (2010): EXTEND & PRETEND:Manufacturing a Minsky Melt-Up!, April 9
http://home.comcast.net/~lcmgroupe/2010/Article-Extend_Pretend-Manufacturing_a_Minsky_Melt-Up.htm
12
Figure 9 – Re-constructed US GDP Growth by Shadow Govt. Statistics13
Figure 10 – Financial Sector Borrowings14
On the other hand, the financial sector borrowing does not seem as extreme as
consumer segment (Figure 10). That is because the financial sector began to lever-up
much earlier, that is, since 1983 as indicated by the debt-to-GDP chart shown in Figure
13
14
Williams, John (2010): www.ShadowStats.com
www.PrudentBear.com
13
11, with the only exception of the de-leveraging that took place in the aftermath of the
stock market crash in 1987 and dotcom bubble (2000-2003).
Unlike the financial and consumer segments, the commercial and industry sector
began to lever-up much earlier (1975) as demonstrated by Figure 12. Note that the
commercial sector de-leveraging today is happening at a faster pace than the previous
three recessions (1975, 1991 and 2001), which could be an indicator of slowing
manufacturing investment and inventory depletion which could lead to even higher
unemployment than illustrated in a later figure (Figure 29, p. 32).
Figure 11 – US Financial Institution Debt as a % of US GDP
Figure 13 indicates that the existing debt in the entire US system (consumers,
businesses, financials and government) is over $50 trillion, and Figure 14 depicts these
figures in a normalised manner using the debt-to-GDP ratio. This illustrates the dire
situation in the US with debt-to-GDP ratio that is higher that in the midst of the Great
Depression
in
1933,
when
the
GDP
had
already
collapsed
by
26-28%
and
unemployment hit a peak of 25%.
14
Figure 12 – Commercial and Industrial Loans15
Figure 13 – US Total Debt (Consumers, Businesses, Government and Financial
Institutions)16
A simply calculation will reveal the debt trap that US will be facing in the coming
years, not to mention that large budget deficits it is planning in the next decade (see
15
Williams, John (2010): Updated Liquidity and Economic Outlook – Mounting Liquidity Squeeze, April 9, 2010,
John Williams‘ Shadow Government Statistics
16
http://www.prudentbear.com/index.php/total-system-debt
15
Figure 46, p. 54). At this debt level even a 1.00% (100 basis point) rise in interest
rates will wipe out $510 billion from the GDP growth due to rise in debt-servicing
burden.
This additional interest payment would amount to 3.6% GDP growth on a
current US GDP of $14 trillion. This is the type of debt-trap analyses IMF economists
are familiar with special reference to poor developing countries, but now it seems these
IMF economists need to turn their heads in the direction of their hosts.
This level of indebtedness in a developed country like the USA without even
accounting for future retirement and social security benefits liabilities which is another
$73 - $106 trillion in current dollars (mentioned later in the paper) for retirement
promises in the coming 70 years. All this money have thus far been accounted for on a
cash-basis rather than on an accrual basis (owed liabilities on US Govt. Balance Sheet)
to make the US government obligations look small to investors who are investing in
government bonds. This improves the US Government‘s chances of issuing debt in the
short term, but a day of reckoning is nearing when promises will have to be broken and
all hell will break loose in financial markets. This day may only be a few years away as
expressed in a survey of readers of Dr. Martin Weiss‘ newsletter.
Figure 14 – US Total Debt as a % of GDP17
17
Conrad, Bud and David Galland (2009): Green Shoots or Greater Depression, August 2009, p. 2
16
Figure 15 – Project US Debt-to-GDP Ratio till 201418
Figure 15 is an estimate of debt-to-GDP ratio by Societe Generale in their
November 2009 report, which assumes that this ratio will decline to a sustainable level
due to de-leveraging by all four segments in the US economy. This does not account
for the $1.0 trillion budget deficit that the US Government is planning to run for the
next decade. This is not sustainable as this author‘s research indicates that sustainable
debt-to-GDP ratio is between 150% and 200%.
If this global economy has thus far been fuelled by US consumers (as mentioned
ealier), then consumers in other countries better take-up the slack going forward
because US consumer is not coming back to the party for a while because they are just
beginning to re-build their Balance Sheet and shore-up savings as illustrated in Figure
4, which is absolutely the wrong time to start saving just when the global economy
most needs their spending power.
18
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 12
17
More Bad News on the Way
The graph below indicates the mortgage resets for the next grade of mortgages in
the US, that is, Alt-A and Prime mortgages. Alt-A is the next level up from subprime and
Prime is the best quality mortgage that is the envy of all lenders. These two segments
comprise another $1.4 trillion in loan portfolios for the financial institutions.
The rate
resets in these two segments have begun as of mid-2009, and will continue until mid2012 as shown in Figure 16. In a CBS 60 Minutes interview Whitney Tilson19 told the
host in 2009 that about 50% of Alt-A mortgages will default in the next two years.
Figure 16 – US Retail Market Mortgage Resets in the Coming years 20
As if this news was not bad enough, $6.5 trillion commercial real-estate (of which
around $3.0 trillion has been financed by debt) has also begun to rot as small business
(dried by lack of credit) has been closing their doors. This is like adding insult to injury
as small, medium businesses (SMEs) are the back-bone of an economy generating up to
80% of employment growth in any economy.
19
20
http://en.wikipedia.org/wiki/Whitney_Tilson
Credit Suisse
18
Efficacy of Recent Bailouts
―The success in bailing out the system on the previous occasion led to a
super bubble, except that in 2008 we used the same methods….Unless we
learn the lessons, that markets are inherently unstable and that stability
needs to the objective of public policy, we are facing a yet larger bubble….We
have added to the leverage by replacing private credit with sovereign credit
and increasing national debt by a significant amount.‖ 21
-
George Soros
Since the collapse of the credit markets consumers and businesses have been shut
off from credit. Instead the US government has become the spending of last resort as
reflected in Figure 17.
This is not a sustainable situation as the government itself is
dependent on the tax revenues from the two wealth creating sectors - consumers who
provide the human capital and businesses that provide the know-how and machinery for
this human capital to be tapped. If these two important sectors in the largest economy
in the world are retrenching, then the government can only sustain the economy for a
limited time.
Figure 17 – US Government Doing the Heavy Lifting that Markets are meant for 22
21
Soros, George (2010): We Are Repeating The Mistakes of Our Past, April 15, 2010,
http://pragcap.com/soros-we-are-repeating-the-mistakes-of-our-past
22
―Green Shoots or Greater Depression‖, Bud Conrad and David Galland, Casey Research, August 2009, p.3
19
Table 2 below illustrates the $2.0 trillion in stimuli funds that has been spread
across the various countries and regions. The stimuli range from 1% of GDP for Russia
to 15% for China. This stimulus is like a one-shot deal something akin to a booster shot
taken for a flu where one is not sure if it will eventually prevent one from contracting the
flu.
The effects of this type of one-shot stimuli are not sustainable in the face of the
bursting of the greatest credit bubble in history, where consumers and businesses face
much stiffer cost of credit or no credit at all in the case of SMEs.
Table 2 – Over $2.0 trillion in Stimuli Spent by Nations23
Professor Barry Eichengreen (University of California, Berkeley) has been charting
various parameters to compare the extent of damage from this crisis with the Great
Depression24.
Figures 18 , 19, and 20 track the World Industrial Output, World Stock
Markets, and World Trade Volume, respectively.
The X-axis is in months after the
outbreak of the crisis. These figures have been updated up to June 2009 data.
Drop in World Industrial Output (Figure 18) is tracking 1920s curve almost
exactly months after the stock market crash/credit crisis.
Drop in the stock indices
(Figure 19) is more remarkable this time around compared to 1930s when the Dow
Jones Industrial Average collapsed by 88%, although there has been some improvement
23
24
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 15
Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us?
http://voxeu.org/index.php?q=node/3421, March 8
20
this time around due to the massive one-off stimulus package - not to mention the
drastic cuts in interest rates by all governments as shown in Figure 21.
What is surprising is that even after implementing these extreme measures the
world trading volumes were still dropping, albeit stimulus packages take a while to work
through the economy. When Professor Eichengreen updates the figures next time it will
be interesting to see if global recovery (greenshoots theory) has indeed taken hold
where businesses inventories are building up with an increase in industrial capacity
utilisation, which in turn will lead to employment and income growth, which in turn leads
to consumer spending.
Figure 18 - World Industrial Output, Now vs Then (updated)25
Figure 19 - World Stock Markets, Now vs Then (updated)26
25
Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us?
http://voxeu.org/index.php?q=node/3421, March 8
26
Ibid.
21
Figure 20 - The Volume of World Trade, Now vs Then (updated)
Figure 21 - Central Bank Discount Rates, Now vs Then (7 country average) 27
Figure 22 demonstrates the impact of the slowdown on industrial output in four
major European economies. It seems that France and Italy had experienced faster drop
in industrial output than in the 1930s, whereas Germany and UK are tracking the
previous Great Depression exactly months after the breakout of the crisis.
27
Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us?
http://voxeu.org/index.php?q=node/3421, March 8
22
Figure 23 highlights the drop in industrial output in non-European countries
(Canada, Chile, Japan and US). Although all these countries had experienced a drop in
industrial output, the drop has been far less significant than France and Italy (Figure 22).
Figure 22 - Industrial output, four big Europeans, then and now 28
28
Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us?
http://voxeu.org/index.php?q=node/3421, March 8
23
Figure 23 - Industrial output, four Non-Europeans, then and now29
Amongst the small European countries (Belgium, Czechoslovakia, Poland and
Sweden) Poland has been least affected by the ‗Great Recession‘ (Figure 24) and
experienced somewhat of a recovery. It is too early to conclude that this recovery can
be sustained going forward without Poland‘s major trading partners in Europe going into
recovery.
29
Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us?
http://voxeu.org/index.php?q=node/3421, March 8
24
Figure 24 - Industrial output, four small Europeans, then and now. 30
Professor Eichengreen concludes that:
 World industrial production continues to track closely the 1930s fall, with no clear
signs of ‗green shoots‘.
 World stock markets have rebounded a bit since March, and world trade has
stabilised, but these are still following paths far below the ones they followed in the
Great Depression.
30
Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us?
http://voxeu.org/index.php?q=node/3421, March 8
25
 There are new charts for individual nations‘ industrial output. The big-4 EU nations
divide north-south; today‘s German and British industrial output are closely tracking
their rate of fall in the 1930s, while Italy and France are doing much worse.
 The North Americans (US & Canada) continue to see their industrial output fall
approximately in line with what happened in the 1929 crisis, with no clear signs of a
turn around.
 Japan‘s industrial output in February was 25 percentage points lower than at the
equivalent stage in the Great Depression. There was however a sharp rebound in
March.
Figure 25 depicts the latest retail sales figures in the US which provides some hope
of an economic recovery.
Figure 25 – Inflation-adjusted Retail Sales in the US31
However, John Williams of Shadow Government Statistics has this to say about the
latest retail figures:
31
Williams, John (2010): March CPI, Retail Sales, Trade (No. 291), John Williams‘ Shadow Government
Statistics, April 14
26
For the last 16 months, monthly real retail sales (CPI-U deflated) have been
fluctuating around an average of $161.2 billion (the deflated March number was
$166.8). Smoothed for monthly volatility on a six-month moving-average basis,
as shown in the accompanying graph, the pattern of activity here has shifted to
bottom-bouncing in terms of the level of inflation-adjusted sales. The recent
bounce from short-lived factors and warped-seasonals appears likely to turn much
lower in the months ahead. There has been no fundamental turnaround in
economic activity — no recovery — just general bottom-bouncing, as should be
confirmed anew in subsequent reporting32
Figure 26 – Industrial Production in the US through March 2010 33
John Williams comments below on recent bounce in US Industrial Production
The June 2009 reading of 95.75 remained the record low for annual
production growth since the shutdown of war-time production that followed
World War II. For the last 15 months, the production index has averaged
98.87, around which the series has been fluctuating, with March‘s six-month
moving average reading at 100.50, versus 101.61 for the single month.
The "recovery" in production is shown in the above graph, where month-tomonth volatility is smoothed using a six-month moving average. Production
activity has leveled off at a low-level plateau of activity that effectively has
wiped out the last eight years of growth in industrial production. Despite the
near-term upside bump generated by short-lived stimulus and seasonal
distortions, the series generally still is bottom-bouncing and should begin to
soften anew, significantly, in the next several months.
32
Williams, John (2010): March CPI, Retail Sales, Trade (Commentary No. 291), John Williams‘ Shadow
Government Statistics, April 14
33 Williams, John (2010): March Housing Starts, Industrial Production, (Commentary No. 292, Housing Still
Bottom-Bouncing, Production Set to Soften, April 16, 2010
27
Figure 27 – Housing Starts in the US through March 2010 34
Again John Williams of Shadow Government Statistics comments on US Housing
Starts:
Since December 2008, housing starts have been bottom-bouncing at an
historically low level, averaging a seasonally-adjusted annual rate of
565,400. In the past 16 months, all monthly readings have been within the
normal range of monthly volatility for the series around that average,
including March 2010‘s reading of 626,000.
The "recovery" in housing is shown in the above graph. The data are
smoothed using a six-month moving average to remove the extreme monthto-month volatility seen in this series. Regardless of any level of smoothing,
though, in the current cycle, housing starts remain at least 25% below any
levels seen since before the end of World War II. Along with the activity in the
broad economy, a renewed downturn in housing appears to be in the offing.
The following is an excerpt from Richard Russell‘s recent newsletter about the
recent recovery35:
He wrote after the market closed Friday: "I think this bear-market rally is in
the process of breaking up. I'm guessing that the Dow is going to run into
some panic action early this year, and I think the Dow will violate first its
November low and then its March low."
"I believe we're heading into something that nobody, in their wildest dreams,
is thinking about. What will it be? It will be a full correction of the entire rise
from the 2002 low of 7,286 to the bull market high of 14,164.53 set on Oct.
34
Williams, John (2010): March Housing Starts, Industrial Production, (Commentary No. 292, Housing Still
Bottom-Bouncing, Production Set to Soften, April 16, 2010
35
Russell, Richard (2010): Dow Theory Letters. January 31, www.dowtheoryletters.com at
http://www.controlledgreed.com/2010/02/richard-russell-moves-into-apocalyptical-mode.html
28
9, 2007. Remember, I warned about the 50% Principle which came into play
at the halfway level of the Dow 2002 to 2007 advance? That halfway level
was 10,725. ... Having risen to 10,725.43 on Jan. 10, the Dow then turned
down. I consider this extremely bearish action."
Russell went on: "I see the Dow declining to the low from which the entire
rise started. That low was the 2002 low of 7,286. If the Dow does not halt its
decline at 7,286, I see it sinking down to its 1980-82 area, which would be
around Dow 1,000."
Appendix G contains a recent article by Gary Dorsch (a great analyst in Israel who
is best at correlating money supply, market and commodities) how Central Banks are
stoking this recovery.
Although a 70% recovery in the Dow Jones Industrial Average
(DJIA) has been achieved thus far, it has to be viewed from the perspective of
tremendous amount of money that has been thrown at the financial institutions ($1.75
trillion). Short of lending where else would we expect this money to end-up but financial
markets.
History As Our Guide
In this section impact of recession, real-estate and equity price drop on the banking
system and the number of years it took to resolve the banking crises, and we could
perhaps conclude that vice versa would also be true, that is, impact of banking crises on
various sectors of the economy, especially, in the absence of consumer savings in the
developed world and credit being the grease in contemporary economies.
Figures 28 through 34 were adapted from Professors Carmen Reinhart and Kenneth
Rogoff‘s work.
They demonstrate in Figure 28 that the duration of banking crisis in
various countries can be correlated to drops in real-estate prices.
On average banking
crises last about 6 years from an average drop in real-estates prices of 35.5%.
The
longest has been 17 years for Japan resulting from a drop of 38% in real-estate prices
that began in 1992 and still not out of the danger zone.
29
Figure 28 – Real House Price Cycles and Banking Crisis36
Figure 29 illustrates that banking crisis can also result from equity price declines.
Average equity decline for the select group of countries has been 55.9% for which
banking crises lasted on average 3.4 years. The longest has been an 85% drop in equity
prices in Thailand in the aftermath of the Asian Currency Crises which resulted in banking
crisis that lasted for 5 years.
36
Rogoff, Kenneth and Carmen Reihart (2009): The Aftermath of Financial Crises, p. 5
30
Figure 29 – Real Equity Price Cycles and Banking Crises37
Figure 30 illustrates the relationship between a rise in unemployment (due to
recessions) and banking crises. On average a rise in unemployment by 7 percent has
extended banking crises for 4.8 years on average.
The largest rise in unemployment
(23%) has been in the US during the Great Depression which extended the banking crisis
for 4 years. Surprisingly the longest duration (10 years) for banking crisis has been in
Japan from a measly 3% rise in unemployment.
37
Rogoff, Kenneth and Carmen Reinhart (2009): The Aftermath of Financial Crises, p. 6
31
Figure 30 – Unemployment Cycles and Banking Crises38
Figure 31 was obtained from Shadow Government Statistics. The figure contains
three plots of unemployment data.
Lower two lines (grey and red) are government-
reported unemployment numbers and the upper navy blue line has been re-constructed
by John Williams of Shadow Government Statistics, who has re-created the figures using
old measures prior to Professor Michael Boskin becoming Economic Advisor to President
Clinton. Prof. Boskin not only did not count people who dropped off the unemployment
benefit roster, which lasts only for 6 months, but also used computer models to compute
business start-ups and closures as proxies of employment growth. John Williams adjusts
his numbers by using actual payroll numbers from ADP39 to offset the computer
generated number to create a sense of reality in the unemployment figures. Therefore,
according to John Williams‘ figure unemployment is currently running around 22% in the
US, although there has been some improvement of late.
38
39
Rogoff, Kenneth and Carmen Reinhart (2009): The Aftermath of Financial Crises, p. 7
A leading payroll processing company in the US.
32
Figure 31 – Re-constructed Unemployment Figures using Old/Honest Methods 40
This is just one set of data that John Williams has re-constructed.
There are
other data which has been ‗massaged‘ by the US Government in order to make the
economy look rosier than it actually is, in order to get the foreigners to continue funding
the gaping trade and budget deficits of the US. The US Government also under-reports
Inflation, which puts less burden on government budget that would provide realistic cost
of living adjustments to retirees.
That is why one has to parse through all the
mainstream reported official data in order to see what is actually happening in the
economy.
Figure 32 below illustrates the impact of falling GDP on the duration of banking
crisis.
Historically an average GDP decline of 9.3% resulted in 1.9 years of banking
crisis.
In the case of the US the GDP dropped by 26-28% during 1929-1933 which
extended the banking crisis up to 4 years.
40
Williams, John (2010): www.ShadowStats.com
33
Figure 32 – Per Capita GDP cycles and Banking Crises41
Figure 33 – Re-constructed US GDP figures using Re-constructed GDP Deflator42
41
42
Rogoff, Kenneth and Carmen Reinhart (2009): The Aftermath of Financial Crises, p. 9
Williams, John (2010): http://www.shadowstats.com/alternate_data
34
In Figure 33 (above) John Williams has re-constructed the US GDP figures since
1982 using his re-constructed GDP figures (blue line), and demonstrates that US has not
had a positive GDP growth since 2000 when adjusted for re-constructed inflation. In fact
US has not had sizeable GDP growth since 1990 if one assumes a margin of error of
0.5% which is not uncommon as these figures often get revised within months of first
publishing. Therefore, when viewed from alternative perspective it is a far-cry that US
has been the haven of productivity growth that Chairman Greenspan so proudly touted
during the internet boom years that was attributed to information technology.
Figure 34 – Cumulative Increase in Public Debt following (3-years) Banking Crises43
Figure 34 (above) demonstrates that in the aftermath of a banking crisis the
government debt on average increased by 86.3% within 3 years. The largest increase
for a developed country (Finland) was nearly 175% in 1991 – the same magnitude as
Chile in 1998 which is a developing country. Therefore, banking crisis is not a claim to
infamy for just developing countries as it has happened to developed countries as well,
43
Rogoff, Kenneth and Carmen Reinhart (2009): The Aftermath of Financial Crises, p. 10
35
and we are in the midst of a major one. Although the epicentre of this crisis was the US,
it has since graduated to sovereign debt crisis (Greece) and slowly we will witnessing
more sovereign debt crises as governments overextend themselves into debt in trying to
prop-up their banking system while their tax collections dwindle.
Initially, Europeans were quick to point the finger at the US without taking stock of
toxic assets and overextended governments in their own backyard.
Sooner or later
sovereign debt ratings will be affected due to this over-extension causing the risk
premium imputed in interest rates to rise, which will further strain household, business
and governments with their existing debts.
Rogoff and Reinhart conclude that44:
An examination of the aftermath of severe financial crises shows deep and
lasting effects on asset prices, output and employment. Unemployment rises
and housing price declines extend out for five and six years, respectively. On
the encouraging side, output declines last only two years on average. Even
recessions sparked by financial crises do eventually end, albeit almost
invariably accompanied by massive increases in government debt.
How relevant are historical benchmarks for assessing the trajectory of the
current global financial crisis? On the one hand, the authorities today have
arguably more flexible monetary policy frameworks, thanks particularly to a
less rigid global exchange rate regime. Some central banks have already
shown an aggressiveness to act that was notably absent in the 1930s, or in
the latter-day Japanese experience. On the other hand, one would be wise not
to push too far the conceit that we are smarter than our predecessors. A few
years back many people would have said that improvements in financial
engineering had done much to tame the business cycle and limit the risk of
financial contagion.
Since the onset of the current crisis, asset prices have tumbled in the United
States and elsewhere along the tracks lain down by historical precedent. The
analysis of the post-crisis outcomes in this paper for unemployment, output
and government debt provide sobering benchmark numbers for how the crisis
will continue to unfold. Indeed, the Great Depression in the United States,
were individual or regional in nature. The global nature of the crisis will make
it far more difficult for many countries to grow their these historical
comparisons were based on episodes that, with the notable exception of way
out through higher exports, or to smooth the consumption effects through
foreign borrowing. In such circumstances, the recent lull in sovereign defaults
is likely to come to an end. As Reinhart and Rogoff (2008b) highlight, defaults
in emerging market economies tend to rise sharply when many countries are
simultaneously experiencing domestic banking crises.
44
Rogoff, Kenneth and Carmen Reinhart (2009): The Aftermath of Financial Crises, p. 11
36
Could China Provide Economic Leadership?
The United States began its long trek of becoming the world‘s economic power
house during the 19th Century, leading to domination of the 20th Century. The dominant
power at the start of the 19th Century was the United Kingdom. Today, they have the
6th highest GDP, just ahead of Italy. In 1970, U.S. GDP was $1 trillion and has risen to
$14 trillion today, that is, a 1,300% increase over 40 years.
China‘s GDP in 1970 was $92 billion. Today, it is $4.2 trillion a 4,450% increase
in 28 years. China has been growing their GDP at an 8% to 10% pace for over a decade.
It now has the 3rd largest economy in the world, and will surpass Japan as the 2nd
largest economy on the planet within the next 5 years provided the world economy
continues to grow without any major disruptions.
If that is the case then sometime
between 2030 and 2050, China will overtake the United States as the largest economy in
the world.45
Figure 35 illustrates the phenomenal growth in private enterprises in China
between 1978 and 2003 - from a mere 3,000 enterprises to over 117,000 in a span of 25
years. Figure 36 illustrates the deterioration in US Trade deficit from 1950 to 2007. It is
not a coincident that US trade deficit began to grow in 1980 just when the Chinese
discovered the power of manufacturing outsourcing.
While the US was exporting its
manufacturing base to China, this outsourced value-addition was showing up on US
Balance of Payments which has been offset by Capital inflows from trade-surplus
countries like Japan, China and Saudi Arabia in the form of re-cycled US Dollar that were
then invested in US Treasuries. Essentially this was the trick that kept-up the demand
for US Treasuries which in turn kept US interest rates low for consumer to ‗continue
shopping‘ which kept the Chinese manufacturing plants humming until now. This vicious
cycle or feedback loop is slowly coming to an end, and all those countries that followed
export-led economic growth model will feel it.
45
Quinn, James (2009): CHINA RISING – 21ST CENTURY JUGGARNAUT, June 4, 2009,
http://www.financialsense.com/editorials/quinn/2009/0604.html
37
Figure 35 – Growth in Chinese Enterprises (1978-2003)46
Figure 36 – Growth in US Trade Deficit (1950-2007)47
From Table 3 (below) it can be observed that as of 2008 Chinese exports
comprised one-third of China‘s GDP. From Table 4 we can see that China‘s growth rate
had reached 13% in 2007, and at that rate Chinese GDP would have doubled within 5.7
years. This growth enabled China to re-cycle its vast stash of US Dollar trade surplus
into US Treasuries, which kept a lid on interest mortgage rates that enabled US
46
Quinn, James (2009): CHINA RISING – 21ST CENTURY JUGGARNAUT, June 4, 2009,
http://www.financialsense.com/editorials/quinn/2009/0604.html
47
www.financialsense.com
38
consumers to ‗house hunting‘ and ‗go shopping‘ using MEWs. This is the level of
interdependence between the two countries is something akin to the interdependence
between the UK and US when the former was a developed economy and the latter was
the manufacturing hub in the first-half of the 20th century.
Therefore, having observed the drop in world trade (Figure 18, p.21) it is
questionable whether China can remain unscathed by unfolding crisis and the drop in
consumer spending in the US.
Table 3 – China‘s Dependence on Exports as a % of GDP48
Exports-to-GDP ratio:
Imports-to-GDP ratio:
Trade-to-GDP ratio * :
32.7
% (2008)
25.0
% (2008)
57.7
% (2008)
% OF THE WORLD (excluding Intra-EU Trade)
2006
2007
2008
Imports
8.0%
8.3%
8.8%
Exports
11.3%
12.3%
12.3%
Table 4 – China GDP and Growth, Inflation and Current Account Balance (2005-2008)49
Current GDP:
GDP per capita:
2,992.7
Billions of euros - 2008 (estimates after 2008)
2,254.1
Euros - 2008 (estimates after 2008)
2005
2006
2007
2008
Real GDP growth (%, estimates after 2008)
10.4
11.6
13.0
Inflation rate (%, estimates after 2008)
1.8
1.5
4.8
9.0
5.9
Current account balance (% of GDP, estimates after 2008)
7.2
9.5
11.0
10.0
No matter how much Western Economists rant-and-rave about China increasing
its consumption, China‘s continued growth depends on whether ordinary Chinese citizens
have the purchasing power to consumer the products they manufacture.
This is
especially true if the wealth is found to be concentrated amongst the Politburo members,
State-owned Enterprises (SOEs) and their consorts in the private sectors (tycoons).
48
49
European Trade Stastistics, http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf
European Trade Stastistics, http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf
39
For now China is growing with $586 billion in stimulus package passed in 2009 where a
sizeable chunk has gone into building the infrastructure as elaborated below50:
-
38% in Public infrastructure
-
25% in post-quake reconstruction
-
10% in social welfare
-
9% in technology
-
9% in rural development
-
5% in sustainable development, and
-
4% in education/cultural projects
Perhaps China can afford to spend its vast pool of foreign reserves in internal
project, but that will not only hurt the US as interest rates will have to rise but also hurt
China in deflation in the reserve assets. Therefore, it is questionable as to how many of
these stimuli can China afford, and even if China could afford it cannot substitute private
investment and consumption forever.
Some researchers have alluded to the fact that
China is building empty cities (which people cannot afford to move into because of lack
of purchasing power) to keep up the GDP and employment growth in order to avoid
social unrest by 100-150 million farmers who are leaving farms for better paying
manufacturing jobs. Therefore, China also faces real problems which are in some ways
bigger than what Greece or Spain may be facing in the midst of this crisis.
Nonetheless Societe Generale (SocGen) has provided their estimate of China‘s
growth that will comprise a bigger portion of world GDP by 2014 (Figure 37 below).
SocGen estimates that China, which comprised 9% of world GDP in 2009 (same as
Japan) will command 12% of the global GDP by 2014.
The transfer of wealth from
advanced economies, such as the US and Japan, to emerging economies such as China
can be denied.
According to the IMF, the contribution of emerging markets to global
GDP will increase from 24% to 50% by 2014. If we assume that emerging market GDP
50
―Investing in China‟s Infrastructure”, April 2010, EuroPacific Capital, www.Europac.net
40
per capita increases to 25% of that of developed countries then global GDP, with the
shift shown above in emerging markets‘ weight, would increase by 50%!51
Figure 37 – Projected Relative Sizes of Economies in 201452
On one hand it is not surprising that this wealth is taking place, as China has
become the manufacturer of the world, and even in the midst of the ‗great recession‘ it
still has the know-how and the capital in the form of machinery to plough forward. Other
countries like the US and UK have been hollowed-out of their manufacturing capability
and capital base, leaving them nothing other than their ‗great efficient capital‘ markets
and their reputation (past glory) to continue issuing debt and paper until that confidence
is shattered. Below is poignant quote pointed at the UK and the US governments‘ creditworthiness going forward, as Standard & Poor‘s (leading credit-rating agency in the
world) has dropped hints in 2009 of possible downgrading of their ratings:
―If you once forfeit the confidence of your fellow citizens, you can never
regain their respect and esteem. It is true that you may fool all of the people
some of the time; you can even fool some of the people all of the time; but
you can't fool all of the people all of the time.‖
- Abraham Lincoln, 16th US President (in office 1861-1865)
51
52
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 23
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 23
41
And even if China is able to grow through internal consumption it is the resourcesupplying countries like Saudi Arabia, Malaysia, Brazil, Australia and Russia that would
most likely reap the benefits of Chinese growth, since these countries run a positive
trade balance with China (Table 5). However, this is unlikely as China is dependent on
US and European markets to absorb its outputs.
Table 5 – China‘s Top Ten Trading Partner (2008)
53
CHINA'S TRADE WITH MAIN PARTNERS (2008)
The Major Imports Partners
Rk
1
2
3
4
5
6
7
8
9
10
Partners
Mio euro
The Major Export Partners
%
World
746,760.2
100.0%
Japan
EU27
South Korea
United States
Hong Kong
Australia
Malaysia
Saudi Arabia
Brazil
Russia
100,914.5
88,442.1
82,693.8
54,883.5
40,443.2
23,567.8
23,554.3
21,249.3
20,059.6
17,258.4
13.5%
11.8%
11.1%
7.3%
5.4%
3.2%
3.2%
2.8%
2.7%
2.3%
Rk
Partners
World
1
2
3
4
5
6
7
8
9
10
EU27
United States
Hong Kong
Japan
South Korea
Russia
India
Singapore
Canada
Australia
%
Mio euro
979,215.0
100.0%
205,526.6
185,701.0
127,078.5
81,959.5
51,136.6
22,181.1
22,003.3
21,178.3
17,732.3
16,314.8
21.0%
19.0%
13.0%
8.4%
5.2%
2.3%
2.2%
2.2%
1.8%
1.7%
Table 6 – China/US Trade Statistics (in billions, US$) (2001-2009) 54
US exports
% change
US imports
% change
Total
% change
US balance
2000
16.3
24.4
100.0
22.3
116.3
22.6
-83.7
2001
19.2
18.3
102.3
2.2
121.5
21.4
-83.0
2002
2003
2004
2005
2006
2007
2008
22.1
28.4
34.7
41.8
55.2
65.2
71.5
15.1
28.5
22.2
20.6
32.1
18.1
9.5
125.2 152.4 196.7 243.5 287.8 321.5 337.8
22.4
21.7
29.1
23.8
18.2
11.7
5.1
147.3 180.8 231.4 285.3
343
386.7 409.2
21.2
22.8
28
23.3
20.2
12.7
5.8
-103.1 -124.0 -162.0 -201.6 -232.5 -256.3 -266.3
2009
69.6
-2.6
296.4
-12.3
366.0
-10.6
-226.8
Table 6 illustrates the deteriorating US trade imbalance, which can be correlated
to the manufacturing job lost in the US. In 2008 US trade deficit had reached an all-time
53
European Trade Stastistics, http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf
54
http://www.uschina.org/statistics/tradetable.html; Notes: US exports reported on FOB basis; imports on a
general customs value, CIF basis Source: US International Trade Commission
42
high of $800 billion of which $266 was with China alone – this is clearly 33% of the trade
deficit.
Could India Lead The Way Forward?
As of the first quarter 2009, the leading economic indicator for India (Figure 38)
stopped declining and flattened, but has not turned up yet. Hopefully, future data will be
more rosy, and indicates an upturn.
According to CIA Factbook55 India faced an industrial slowdown early in 2008
due to the global financial crisis, but nonetheless led annual GDP growth to
slow to 6.1% in 2009 – the second highest growth in the world among major
economies. India escaped the brunt of the global financial crisis because of
cautious banking policies and a relatively low dependence on exports for
growth.
Domestic demand, driven by purchases of consumer durables and
automobiles, has re-emerged as a key driver of growth, as exports have fallen
since the global crisis started. India's fiscal deficit increased substantially in
2008 due to fuel and fertilizer subsidies, a debt waiver program for farmers, a
job guarantee program for rural workers, and stimulus expenditures. The
government abandoned its deficit target and allowed the deficit to reach 6.8%
of GDP in FY10.
Figure 39 below forecasts India‘s agricultural output drop of 4-5% in the coming
year (2009-2010), which comprises 16% of India‘s GDP (Table 7). Considering the scale
of the drought this estimate is very rosy. However, estimates of Industrial production
growth (Table 7) is still optimistic perhaps due to the fact that India does not export
much in the way of manufactured goods compared to China.
Figure 38 – Leading Economic Indicators for India are not Up Yet 56
55
56
CIA Factbook: https://www.cia.gov/library/publications/the-world-factbook/geos/in.html
Joseph, Mathew et. Al. (2009), The State of the Indian Economy 2009-2010, October 2009, p. 25
43
Figure 39 – Agricultural Output and Projections57
Table 7 - Indian GDP Forecast58 - Perhaps India has room for growth without Exports
Growing Debt and Derivatives Problems
As if slowing economies was not a big enough blow to the global economy, and
now the developed world is faced with a rising pool of retirees in the next decade which
needs to be financed through debt.
countries.
Table 8 illustrates this rising debt levels in G-20
Projections of rising debt levels in developed countries is also a cause for
concern at a time when interest rates are creeping up, which implies that rising debt will
shift national income from investment to debt-servicing. This debt burden for developed
economies in the worse-case scenario provided by SocGen (below) is even more
alarming than IMF figures in Table 8.
57
58
Joseph, Mathew et. Al. (2009), The State of the Indian Economy 2009-2010, October 2009, p. 24
Joseph, Mathew et. Al. (2009), The State of the Indian Economy 2009-2010, October 2009, p. 26
44
Figure 40 – Total Public Debt in the World59
Figure 41 – Debt-to-GDP ratios of Developed versus Developing Countries 60
59
60
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, Front-page
―Worst-Case Debt Scenario‖, Client Report, Societe Generale, November 2009, p.21
45
Table 8 – Projected Rise in Government Debt-to-GDP Ratio in G-20 Countries
Some countries like Japan, US, Italy and India (Table 8) have already reached the
point of no return in their public debts, and they do not have a choice but to inflate in
order to avoid deflation in this ‗great recession‘, and others like UK, France and Germany
are not far behind.
The IMF says that debt-to-GDP ratio of advanced countries is expected to rise by
20 percentage points in 2009 - the most pronounced upturn in the last few decades. The
one-year increase in government debt is three times as large as that experienced during
the 1993 recession.61 The IMF says fiscal balances will be severely affected by the crisis
in the short run. For G-20 advanced economies, fiscal balances are projected to worsen,
on average, by 8 percentage points of GDP in 2009 relative to 2007, reaching 93⁄94
percent of GDP in 2009.
The fiscal balances of G-20 emerging economies deteriorate
less—given the lower impact on growth, automatic stabilisers and fiscal stimulus—but
61
IMF says G-20 Advanced Nations‘ Debt-to-GDP ratio to increase by 20% in 2009, June 11, 2009,
http://www.finfacts.ie/irishfinancenews/International_4/article_1016894_printer.shtml
46
still significantly (reversing the improvement achieved since 2003). For the advanced
countries, half of the deterioration is due to fiscal stimulus and financial sector support,
while for emerging economies, a relatively large component is due to declining
commodity and asset prices.62
Figure 42 – Debt as a percent of GDP in Select Major Developed Countries 63
Comparatively the developing countries are better off in terms of their debt levels
(Figure 41, Table 8), however, developing countries do not have to account for
retirement welfare benefit payments as these programs are non-existent in those
countries.
This is the twin-edged sword of economic growth as consumer spending
comprises 60-70% of GDP in most countries. Therefore, if consumers are not given reassurance about their retirement then they are bound to save at higher rates than their
counterparts in developed countries. Therefore, it is an exercise in futility to expect the
consumers in developing countries to take a lead rejuvenating the global economy and
thus increasing their spending and abandon their saving habits in the absence of such
public retirement guarantees.
With the global GDP at $60 trillion (2009), and globally government debt is about
to grow to $45 trillion by 2011 (without counting the debt of other sectors – consumers,
62
63
IMF Staff Team, “Fiscal Implications of the Global Economic and Financial Crisis”, June 2009
―Worst-Case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 6
47
business and financial institutions), then a small rise in interest rates (4 to 5%) would
take away 0.75% from global GDP growth. Does this mean that the global economy has
reached debt saturation and counterproductive, where any growth in global income is
offset by interest payments? And all this is happening at a time when there is a great
deal of uncertainty over interest rates and $604.6 trillion exchange-traded derivatives
market64 of which 72.3% was related to interest rate derivatives.
Most likely there is
another $600 trillion in over-the-counter derivatives (customised derivative contracts
between two parties) which are not exchange traded that would account for the total
derivatives outstanding as of March 2009 at $1.28 quadrillion (that is, 10 to the power
15)65.
Congressional Budget Office (CBO) has provided the worst- and best-case
scenarios of US Government Debt-to-GDP ratios based on trillion$ budget deficit the US
government is embarking on in the coming years shown on Figure 43.
On the other
hand Figure 44 illustrates the transfer payments due to retirees in the next 70 years,
which have thus far been accounted in CBO budgets on a cash basis which amounts to
additional $73 trillion in future US Government liabilities.
Figure 43 – US CBO Estimates US Govt. Debt-to-GDP Ratio Under Two Scenarios66
64
www.BIS.org; http://www.bis.org/statistics/otcder/dt1920a.pdf
http://thecomingdepression.blogspot.com/2009/03/outstanding-derivatives-128-quadrillion.html
66
Conrad, Bud and David Galland (2009):“Green Shoots or Greater Depression”, Casey Research, August 2009
65
48
Figure 44 – Concord Coalition (NGO) Rendition of Future Liabilities of US Govt. To
Retirees67
Money and Markets68 is a US research and investment advisory firm that provides
insights into what is happening in the US financial markets.
They recently surveyed
2,000 of their readers with three question, and below are their responses:
67
http://www.concordcoalition.org/
49
Question 1. Will Washington stop its spending, borrowing and printing spree
before it‘s too late to save the U.S. economy?
Yes: 8.2%
No: 91.8%
Question 2. If your answer is ―No,‖ how much longer do you believe
America can continue before the Treasury bond market collapses and the
recovery is sabotaged?
One year or less: 28.6%
One to two years: 58.5%
More than two years: 12.9%
Question 3 — ―What events do you believe could force Washington to
reverse course?‖
The optimists among our readers feel that the November elections could offer
a ray of hope — but many others point out that BOTH parties are equally
guilty of piling up huge deficits.
The vast majority say it‘s simply too late to avoid a major bond market crash
and interest rate explosion. They‘re predicting that foreigners will soon stop
buying U.S. debt ... that America‘s credit rating will be slashed ... that
investors will dump Treasuries en masse ... and even that China, India and
OPEC could refuse to accept U.S. dollars in payment for trade.
These debts levels will have dire consequences for the global economy. Below is a
quote from Societe Generale on countries defaulting on their bonds, and green highlight
specifically mentions about common nature of default in European countries in the
middle ages. Therefore, it is not unlikely that it can happen in modern days as the game
of paper promises, be it debt or currencies, and defaults are as old as empires
themselves.
―Although it is the last survival option in the bag, sovereign borrowers may
have to default; and could do so with limited strings attached as they are not
subject to bankruptcy courts in their own jurisdiction, and would hence avoid
legal consequences. One example is North Korea, which in 1987 defaulted on
some of its government bonds and loans. In such cases, the defaulting
country and the creditor are more likely to renegotiate the interest rate,
length of the loan, or the principal payments. During the 1998 Russian
financial crisis, Russia defaulted on its internal debt, but did not default on its
external Eurobonds. Further back in history, European countries frequently
defaulted Spain did so 13 times in the Middle Ages. The damage to the
country‘s economy can be harsh as it will suffer from higher interest rates and
capital constraints in the future. But remember that all major economies apart
from the US have a long history of sovereign defaults.‖69
68
69
http://www.moneyandmarkets.com/
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 22
50
Dr. Jim Willie of The Hattrick Letter drew a flow chart to depict what are the chain
of events that will lead up to this eventuality (Figure 45).
Dr. Willie provided this
scenario in December 2009, and so far it has come half-circle with Greek financial
turmoil, and if we are lucky enough we will witness the remaining half of the diagram
play out in the next two years, if Dr. Willie is to maintain his public credibility.
Figure 45 – Chain of Events Leading up to US Treasury Bond Default 70
First Things First – Reduce Government Debt?
Societe Generale analysts71 have provided four options to lower government debt.
One option is to raise tax which is not viable in the face of rising unemployment, rising
debt-servicing burdens and rising cost of living (Figure 46). The other two options are to
reduce government expenditures and privatise government enterprises. The option that
US Government has chosen is to explode its debt, since there is not much cash to be
released from State Enterprises which were sold off during President Reagan‘s time,
unlike for communist or socialist governments that own state enterprises.
70
71
Willie, Jim (2009): The Hatrick letter, December 15
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 21
51
The last option suggested by SocGen is to devalue the currency thus repaying
debts with deflated currency.
This goes smack against Islamic Law of debt deflation,
that is, paying debt with reduced value of the currency. This is the reason why debts are
discouraged in Islam and if incurred for any reason it is mandated to be paid in „ayn
(commodities) and not dayn (promises in paper), otherwise, the creditor gets cheated.
Therefore, usage of paper money leads to uncertainty as one side (debtor) always
wins by paying amounts that is less than due, as actual inflation is always larger than
reported inflation as demonstrated in Figure 53. Elected officials promise the world to
get elected and run up deficits which have to be paid with freshly minted paper, but what
is more surprising is that private investors keep falling into this charade of debt
devaluation through paper money even though history is strewn with stories of
government debt defaults.
Figure 46 – Four Options Provided Below to Lower Government Debt
Many developed country governments, such as US, UK. Japan and a few
European countries, are in a bind now as large proportion of their populations are about
to retire, who did not have enough children to support them or the system in their
52
retirement years (not to mention their secular individualistic value system).
Thus the
dependence on foreign workers and immigrants most of whom are Muslims migrating
from war-torn countries, which in turn has become a dilemma for the developed nations
trying to sort the ‗good Muslims‘ from the terrorists.
These developed nations face dire choices between social unrest if retirement
withers away in deflationary economic collapse, or revolt from younger generation if their
future is destroyed in government finance collapse due to irresponsible issuance of debt
and collapsing economy and currency. This is even more urgent for the US which owes
foreigners $6 trillion in US asset discussed in a later section.
Figure 47 depicts the funding gap (tax collections – expense) for the US
Government. Since 2007 this funding gap has been widening which is directly correlated
to the dire unemployment figures discussed earlier (Figure 29, p.32). This is the reason
why the US Government is running a budget deficit of $1.875 trillion in 2009-2010 fiscal
year (Sep‘09-Sep‗10).
Figure 48 illustrates the projected US Government budget
deficits for the next 10 years. This is colossal amount of debt that needs to be raised
just by the US Government alone, without counting the EU, UK, Japan and other
emerging countries that will also need to tap the capital markets.
Figure 47 – $1.0 trillion Funding Gap in 2009 for the US Government72
72
“Worst-case Debt Scenario”, Societe Generale, November 2009, Client Report
53
Figure 49 shows the amount of debt that governments were planning to issue in
2009. Not sure how much of this was eventually raised but this state of affairs cannot
go on forever and something has to give. Most likely it will be rise in interest rates that
will signal the end of global economic recovery. Also, the world does not have enough
savings or appetite for government debt, unless governments can cajole fund managers
or sequester pension funds by government decree to mandatorily invest in government
bonds.
Figure 48 – Projected US Government Budget Deficit (2009 – 2019)73
73
Conrad, Bud and David Galland (2009): “Green Shoots or Greater Depression”, Casey Research, August
2009, p.5
54
Figure 49 – Projected Sovereign Debt Issuance in 200974
Rogoff and Reinhart conclude that:75
Our analysis has documented some of the links between public and private
debt cycles and the recurrent pattern of banking and sovereign debt crises
over the past two centuries. Banking crisis are importantly preceded by
rapidly rising private indebtedness. But banking crises (even those of a purely
private origin) directly increase the likelihood of a sovereign default in their
own right (according to our findings) and indirectly as public debts surge.
There is little to suggest in this analysis that these debt cycles and their
connections with economic crises have changed appreciably over time.
74
Allison, Tony (2009): Unlimited Debt: When the glass overflows, we all get wet, July 20, 2009,
www.financialsense.com
75
Rogoff, Kenneth and Carmen Reinhart (2010): From Financial Crisis to Debt Crisis, p. 41
55
Last Resort of Government’s
When all else fails governments resort to the printing press. This game can go on
for a little while until people, especially, foreign investors wake up and begin to smell this
rotten game and dump a batch of currencies en-masse for asset that cannot be created
out of thin air.
This is exactly what happened to the Reichsmark in Weimar Republic
Germany between 1919 and1923, soon after signing the Treaty of Versailles when
Germany was loaded by the Allied Powers for paying war reparation payments.
So
Weimar Republic agreed to pay and started printing money so fast that by mid-1923 the
Reichsmark lost its value (Figure 50), so much so that a wheel-barrow of Reichsmark
fetched only a loaf of bread.
Figure 50 – Gold and Silver maintained purchasing power during German Hyperinflation76
Figure 50 demonstrates that hard currencies like gold and silver maintain people‘s
purchasing power when unscrupulous governments try to destroy their currencies. While
the price of gold rose 10 fold in the first year (1923), the increase from 1,000 Marks to
100 trillion marks in the following four years was almost incomprehensible.
When Federal Reserve President Thomas Koenig was appointed to his position as
the President in Kansas City Office in 1991, he said the following:
76
The Bullion Buzz eNewsletter - April 13, 2010, http://www.bmgbullion.com/document/691
56
―When I was named president of the Federal Reserve Bank of Kansas City in
1991, my 85-year old neighbor gave me a 500,000 mark German note. He
had been in Germany during its hyperinflation, and told me that in 1921, the
note would have bought a house. In 1923, it would not even buy a loaf of
bread. He said, ‗I want you to have this note as a reminder. Your duty is to
protect the value of the currency.‘ That note is framed and hanging in my
office.‖
Yet this is exactly what is happening to the US Money Supply as illustrated by John
Williams of Shadow Government Statistics in Figure 51. First, the Fed stopped reporting
M3 Money Supply data in March 2006 (reconstructed in navy-blue by Shadow Stats) as
The Fed was ready to ramp up M3 for the following two years, using the excuse that M2
already contained information about M3. This is an insult to economists who understand
the difference between pure credit money (M3) and long-term deposits and savings
(M2). Then when credit began to collapse in 2008, the Fed opened its money spigot (M1)
shown in Figure 51 and 52, as well as increasing its high powered money (money with
which banks can expand credit) by purchasing toxic assets at nearly par value from the
banks without which all major US banks would have been insolvent.
Figure 51 – Money Supply Data from Shadow Government Statistics (re-constructed US
M3 Money Supply since Federal Reserve Abandonment this Measure in March 2006)77
The following quote was adopted from John Williams recent commentary on US economic
conditions:
77
Williams, John (2010): http://www.shadowstats.com/alternate_data
57
Real Money Supply M3. The signal of pending intensification of the economic
downturn, based on the annual contraction in the inflation-adjusted broad money
supply (M3), was discussed in the prior Commentary No. 290. The annual real
contraction in March M3 (SGS-Ongoing) estimated for that Commentary was
5.8%. Based on today’s CPI-U report, that annual contraction was 6.0%.
Figure 52 illustrates how The Fed has been expanding its Balance Sheet since
September 2008 through printing money out of thin air, and purchasing junk/toxic assets
to re-liquefy the banking system. The Europeans, Japanese and Malaysians have been at
it as well.
The Monetary Base determines the ―potential‖ of the banking system to
extend credit into the economy. The following chart illustrates the geometric growth in
the narrow monetary base:
Figure 52 – Quantitative Easing Gives Way to Flood of Money 78
Dr. Christian Martenson explained succinctly in Figure 53 the life-cycle of fiat
money. Initially people have faith in the currency especially if it is backed by gold, which
is often the practice by IMF shortly after a currency crisis. As soon as confidence in the
new currency takes hold then debt build-up and deteriorating economic conditions
warrant de-pegging of the currency from gold backing as explained in the introduction.
78
http://www.stlouisfed.org/
58
It has been 38 years since the US Dollar was de-pegged from gold (August 15,
1971), and at the rate the Federal Reserve is expanding its Balance Sheet and printing
money out of thin air, the day of reckoning is nearing for the US Dollar, if Dr. Christian
Martenson‘s analysis holds water.
Exponential growth in money creation [supply]
creates problems in a finite world because this leads to exponential growth in demand for
finite resources.
Figure 53 – The Life-cycle of Fiat Currency79
Figure 54 (below) illustrates how closely Gold Price has been tracking the increase
in US M2 Money Supply since 2005.
It is as if the investment community does not
believe in the words of Fed Chairman Bernanke but instead watches his actions. There is
a lot of effort by the banking cabal to suppress the price of gold in order to lure leary
investors who are on the sidelines back into the paper markets of bond and stocks. That
is a different topic about which information can be found on www.GATA.org.
79
http://www.chrismartenson.com/
59
Figure 54 – Dual-axes Chart Showing US M2 Money Supply (LHS) and Gold Price (RHS) 80
Figures 55 (normal scale) and 56 (log scale) illustrates that inflation had been
around 10% in the US colonies since 1665, but had become especially serious since the
creation of the Federal Reserve in 1913.
Figure 55 – Consumer Inflation in American Colonies (1665-2009)81
80
81
Dorsch, Gary (2009): G-20 Inflates the Global Economy to Prosperity, September 11; www.sirchartsalot.com
Hyperinflation Special Report, www.ShadowStats.com, John Williams, Dec 2, 2009
60
Figure 56 – Consumer Inflation in American Colonies (1665-2009)82
Figure 57 illustrates the under-reporting of inflation figures by government
statisticians who have fudged the data to make GDP deflator small to put a rosy picture
on recent GDP growth (since 1995) just when real US GDP stopped growing according to
John Williams (Figure 9, p. 13).
Figure 57 – Re-constructed Inflation by Shadow Government Statistics (1980-2010)83
Dr. Marc Faber84 was recently interviewed on www.Bloomberg.com and reports:
82
83
Hyperinflation Special Report, www.ShadowStats.com, John Williams, Dec 2, 2009
Williams‘, John: http://www.shadowstats.com/alternate_data
61
Prices may increase at rates ―close to‖ Zimbabwe‘s gains, Faber said in an
interview with Bloomberg Television in Hong Kong. Zimbabwe‘s inflation rate
reached 231 million percent in July, the last annual rate published by the
statistics office. He had this to say about US monetary policy:
“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said.
“The problem with government debt growing so much is that when the time
will come and the Fed should increase interest rates, they will be very
reluctant to do so and so inflation will start to accelerate.”
Looking at the size of US assets (‗debt‘) owed to the rest of the world (Figure 58) it
is obvious that the world had become hooked US consumer spending and economic
growth. While world worked hard to earn their living the US on the other hand just had
to crank-up the printing press to pay for the sweat of the labourers in the sweat shops
around the world. This game will only go on as long as people and countries (central
banks) allow themselves and their citizens to be robbed of their labour through a
depreciating currency and inflation. Nonetheless this situation is untenable and a day of
reckoning is approaching for the US and the World.
Figure 58 – Net US Accumulated Investment Position with the Rest of the World 85
Now
that
private investors‘ appetite for
further
US
debt
is
waning
as
demonstrated by Figure 59, how much longer will foreign central banks tolerate
84
85
Faber, Marc: Editor of “Gloom, Boom, Doom Report”, www.gloomboomdoom.com
Conrad, Bud and David Galland (2009): “Green Shoots or Greater Depression”, Casey Research, August
2009, p.5
62
diminution in their investments through devaluation of the US dollar via massive debt
monetization even though Dallas Fed Chief Richard Fisher (Appendix H, p. 95) said the
Fed will not resort to monetization.
Question is can the rest of the world come up with an alternative, or would WTO,
World Bank, BIS and IMF use this crisis as a justification to create bigger economic block
that will be sustained by bigger currencies, when the last biggest currency and their
custodians proved unworthy of our trust that they can manage the value of our savings
in good faith. Or, through the creation of a bigger currency do we need a bigger crisis in
10 or 20 years to learn some lessons.
Figure 59 – Changes in Capital Flows in-and-out of the US86
"The U.S. has one huge advantage, the U.S. alone can print the paper which
its debts are denominated in. This is why the reserve status of the dollar is so
critical to the survival of the U.S. Should the U.S. lose its reserve status, the
result would be an economic collapse."87
86
Conrad, Bud and David Galland (2009): “Green Shoots or Greater Depression”, Casey Research, August
2009, p.5
87
Russell, Richard: The Dow Theory Letter, www.dowtheoryletters.com
63
Prohibition of Riba
―It is illegal for anyone to corrupt (ifsad) people‘s money or currency or to
cause changes or fluctuations in its value. Similarly, it is illegal to treat
money as commodity of trade, otherwise, serious problem will be faced by the
people in the scale only Allah will know its magnitude. What is required is
that money should be treated as capital for business and not commodity for
trade, and when the government prohibits the use of any currency, such must
be accordingly withdraw from circulation‖88
-
Ibn Qayyum al-Jawziyyah (1292-1350CE / 691 AH - 751 AH); a Hanbali
Jurist wrote in his famous book al-Turuq al-Hukmiyyah89
As we have observed markets and asset prices can get distorted for a long time
due to artificially-engineered low interest rates, and very few ordinary people are able to
determine the true value of assets and trade honestly with their hard-earned savings.
These ordinary people get caught up in the financial storms, and no option but to
swallow the bitter pills and new solutions provided by the ‗Master of Money‘.
On the
other hand, the rich can afford expensive advisors to advise them when to exit inflated
financial markets before melt-downs or melt-ups happen, and move onto the next asset
class that is screaming and flailing to be inflated.
In a way prohibition of riba applied on the entire society is a blessing in disguise
from Allah SWT that protects common people so that they do not fall prey to
manipulation of the elite. Unfortunately, Muslims have become blind to this wisdom and
falling headlong into the traps that is impoverishing their societies over and ver again –
first through colonisation and now through dollarization.
Why should we be surprised
since it was prophesied a long time ago.
Abu Sa'id Al-Khudri (r.a.a.) narrated that the Messenger (saw) of Allah SWT
said, "You will surely follow the ways of those nations before you, span by
span and cubit by cubit (i.e. inch by inch) so much so that even if they
entered the hole of the lizard, you will follow them." We said, O Messenger
(saw) of Allah SWT! Do you mean the Jews and the Christians?" He (saw)
replied, "Whom Else?"
88
89
Bukhari 3456, Sahih Muslim,The Book of Trials 67, Volume 2, page 1058
See economic review of this book in Rifat al-Iwadhi, 1985, Min Al-Turath al-Iqtisad li al-Muslimin, p. 245
Azam Ibn Abdul-Rahman, Prof. Dr. Zainal Azam (2001):"Currency Fluctuation and its Effects on Debts and
Obligations in Islamic Law", Jul 2001, IKIM Law Journal, Vol. 5, No. 2, pp.21-38
64
Could Islamic Banking Remedy Wealth and Income Inequity?
Unfortunately, Islamic Banks have also been operating under the same principles
of credit financing using the BBA and Murabaha, rather than practicing wealth
accumulative modes such as Mudaraba and Musharakah where the Raab Al-Maal and the
Mudarib risk their respective capital and labour and accept the risg that is due to them
from Allah Almighty. Instead, current Islamic banking practices are ensuring the growth
of capital for their shareholders and fat compensation for the bankers, and in return for
their money the depositors get a measly 3 or 5% for their deposits which barely beats
inflation.
Besides what can Islamic Banks do when they follow standard set by Basel II that
are meant for conventional banks where Musharakah is so heavily weighted for riskiness,
that it requires larger bank reserves, and thus reduces the banks‘ ability to create credit
to maximise profits for their shareholders. Wealth concentration has most likely reached
its zenith when one hears of news such as the following90. Surely we do not need Allah
Almighty‘s wrath on us before this situation is corrected.
―The number of billionaires around the world has nearly recovered in 2010
after dropping by a third last year during the global financial crisis. There are
now 1,011 billionaires, compared with 793 last year and 1,125 in 2008....
―The net wealth of those billionaires grew to $3.6 trillion from $2.4 trillion last
year, but is still down from 2008's $4.4 trillion, according to the 24th annual
Forbes list, which took a snapshot of wealth on Feb. 12 to compile its
ranking.‖
According to Wilfred Hahn91 74.9% of world oil reserves are in Muslim countries
and yet their Income per Capital is less than $2,500 92 (second lowest only to Hindu‘s at
$1,000 per capital), when per Capita income for Christians and Jews are $20,000 and
$23,000, respectively.
Some might raise the argument that because of our large
numbers this statistic favours smaller communities.
Nonetheless (politics aside) this
number is very lopsided considering that world‘s most precious resource (black gold) is
90
World's mega-rich adding wealth, Carlos Slim No. 1, Reuters - Thursday, March 11,
http://sg.news.yahoo.com/rtrs/20100311/tbs-billionaires-7318940.html?printer=1
91
Hahn, Wilfred (2009): Global Financial Apocalypse Prophecied, 2009, p.252
92
Ibid, p. 302
65
in Muslim lands, and Allah Almighty promises that His SWT Deen will be most dominant
way of life.
―It is He who sent his messenger with the Truth and Guidance so that it may
prevail over all the ways of life even if the mushrikoon detest it.‖ (Surah At
Tawbah 9:33 & As-Saff 61:9)
―It is He who sent his messenger with the Truth and Guidance so that it may
prevail over all the ways of life and all sufficient is Allah for a Witness.‖ (Surah
Al-Fath 48:28)
―[For] Allah has thus ordained: ‗I shall most certainly prevail, I and My
Messengers!‘ Verily, Allah is Qaweeun, A‘zeez!‖ (Surah Al-Mujaadilah 58:21)
The question is how have we worked to implement His SWT system, or has this
wealth become a curse on the Muslims and divided us into many nations and tribes
rather than being one united Ummah? Furthermore, it is questionable whether current
practices of Islamic banking and Muslim politics will deliver a just system of wealth
accumulation and distribution, or is there a need for other forms of representation that
will be more just in giving the rights of the poor?
Conclusion
―I believe that banking institutions are more dangerous to our liberties than
standing armies. If the American people ever allow private banks to control
the issue of their currency, first by inflation, then by deflation, the banks and
corporations that will grow up around [the banks] will deprive the people of all
property until their children wake-up homeless on the continent their fathers
conquered.‖
-
President Thomas Jefferson, 3rd US President (in office 1801-1809)
My conclusion is that we are experiencing the very best recovery that several
trillion in freshly minted money and credit can buy. The recovery mainly seems to exist
on Wall Street, financial markets and in government statistics more than it does on Main
Street and in people's real lives.
There is no doubt that a bounce has been engineered, but the main question is
whether it is the enduring kind or a flash in the pan. No money has gone to household
or small businesses as bailouts have been thrown at ‗too big to fail‖ banks. Therefore,
66
without the participation of small businesses, and with states and municipalities that are
in retreat and retrench, this recovery is quite questionable.
My assessment is that this manufactured bounce will wear off this summer and
that we may be another round of stimulus and Fed liquidity programs before November
elections in the US. Given the political dimensions involved, it is almost certainly a slamdunk to predict more money being dumped into the situation prior to the elections. This
is how low American politics has sunk, that is, give other people‘s money (tax-payers) to
people who only care about greasing their own pockets, i.e. bankers.
Bernard Lietaer, a respected financial figure, and his criticism of today‘s monetary
system should not be taken lightly.
Lietaer‘s criticisms, however, are far more
fundamental than those of either Peter Warburton (author of Debt and Delusion, 1999)
or Austrian economists.
Lietaer directly targets the system of money itself and
specifically the US dollar, warning among other things that93:
―..Unless precautions are taken, there is at least a 50-50 chance that the next
five to ten years will see a dollar crisis that would amount to a global
meltdown.‖
Bernard Laetaer is referring to the US Dollar crisis. This will be a major crisis of
the century because the ‗crack-up‘ or ‗melt-up‘ boom being engineered by our elected
(politicians) and nominated (central bankers) officials will tip the global economy into
hyperinflation and people will chase hard commodities as they will maintain their value in
US Dollars term (the currency that is being inflated). The other option is to let deflation
take its course (letting asset prices take their natural course downward where existing
savings can afford those assets).
Given that politicians do not like to disappoint their
electorate most likely the former option will be chosen.
Gerald Celente concludes that:
As the economic crisis escalates and the debt-based central banking system
shows it can no longer re-inflate the bubble by creating assets out of thin air,
an economic and political rationale for war is easy to come by; for if the
Keynesian doctrine that government spending is the only way to lift us out of
an economic depression is true, then surely military expenditures are the
93
Laetaer, Bernard (2001): The Future of Money, Bernard, Century/Random House 2001
67
quickest way to inject ―life‖ into a failing system. This doesn‘t work,
economically, since the crisis is only masked by the wartime atmosphere of
emergency and ―temporary‖ privation. Politically, however, it is a lifesaver for
our ruling elite, which is at pains to deflect blame away from itself and on to
some ―foreign‖ target. 94
The western central banking cabal (banking families that own the Federal
Reserve) have no interest in doing good for the ordinary people as has become apparent
in the bailouts that have gone to them rather than the ordinary people, who really
stimulate the economy via their spending.
How do people become free from the
shackles of debt when their elected officials have no qualms about putting their citizens
into more debt. So the oppression of the elite will continue until oppressed people find
ways to send a message about these injustices to change their condition.
Having been hooked on the US consumer, the rest of the world built-up
manufacturing capacity that is increasingly being underutilised and they are desperately
in need of new customers. Unfortunately new customers, as good as the US consumers
are not abound, especially, now when everyone is re-building their balance sheets and
savings for rainier days ahead without even referring to retirement.
Government
spending and further debt accumulation cannot sustain a recovery without the
participation of consumers and businesses, and it is a vicious cycle that puts taxpayers
into further debt.
This is the cycle of deflation and Kondratieff cycle that everyone needs to re-learn
if they are to avoid the same mistakes in the future. This mess will take a long time to
resolve, and perhaps never get resolved until the introduction of new economic blocks
and currencies that will be managed by more incompetent regulators and supra-national
global institutions, which will further erode the financial freedom of individual nations to
manage their own destiny. This will lead to more inflation and oppression by the elite.
If history is any guide, last Great Depression in the US did not get resolved until
after WWII, and hopefully, it will not come to that this time around.
94
http://socioecohistory.wordpress.com/2009/08/12/celente-thesis-war-as-the-solution-to-economicdepression/
68
Direct References
1.
www.Kitco.com
2.
―Worst-case Debt Scenario‖, Client Report, Societe General, November 2009
3.
Shedlock, Michael (2005): K Cycle Trends
http://globaleconomicanalysis.blogspot.com/2005/07/great-flation-debate-whatscoming-and.html
4.
US National Debt Clock: www.brillig.com/debt_clock/
5.
http://www.financialsense.com/Market/wrapup.htm
6.
http://www.morganstanley.com/views/gef/index.html
7.
http://www.prudentbear.com/index.php/consumer-debt
8.
Long, Gordon T. (2010): EXTEND & PRETEND:Manufacturing a Minsky Melt-Up!,
April 9
9.
http://home.comcast.net/~lcmgroupe/2010/Article-Extend_PretendManufacturing_a_Minsky_Melt-Up.htm
10. Williams, John (2010): www.ShadowStats.com
11. Conrad, Bud and David Galland (2009): Green Shoots or Greater Depression, August
2009
12. http://en.wikipedia.org/wiki/Whitney_Tilson
13. Credit Suisse
14. Soros, George (2010): We Are Repeating The Mistakes of Our Past, April 15, 2010,
http://pragcap.com/soros-we-are-repeating-the-mistakes-of-our-past
15. Eichengreen, Barry and Kevin H. O‘Rourke (2010): What do the new data tell us?
http://voxeu.org/index.php?q=node/3421,
16. Russell, Richard (2010): Dow Theory Letters. January 31,
www.dowtheoryletters.com at http://www.controlledgreed.com/2010/02/richardrussell-moves-into-apocalyptical-mode.html
17. Rogoff, Kenneth and Carmen Reihart (2009): The Aftermath of Financial Crises, p. 5
18. Quinn, James (2009): CHINA RISING – 21ST CENTURY JUGGARNAUT, June 4, 2009,
http://www.financialsense.com/editorials/quinn/2009/0604.html
19. European Trade Statistics,
http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf
69
20. Investing in China‟s Infrastructure”, April 2010, EuroPacific Capital,
www.Europac.net
21. http://www.uschina.org/statistics/tradetable.html; Notes: US exports reported on
FOB basis; imports on a general customs value, CIF basis Source: US International
Trade Commission
22. CIA Factbook: https://www.cia.gov/library/publications/the-worldfactbook/geos/in.html
23. Joseph, Mathew et. Al. (2009), The State of the Indian Economy 2009-2010,
October, p. 24
24. IMF says G-20 Advanced Nations‘ Debt-to-GDP ratio to increase by 20% in 2009,
June 11, 2009,
http://www.finfacts.ie/irishfinancenews/International_4/article_1016894_printer.sht
ml
25. IMF Staff Team, “Fiscal Implications of the Global Economic and Financial Crisis”,
June 2009
26. Statistics on Derivatives, www.BIS.org,
http://www.bis.org/statistics/otcder/dt1920a.pdf
27. http://thecomingdepression.blogspot.com/2009/03/outstanding-derivatives-128quadrillion.html
28. Conrad, Bud and David Galland (2009):“Green Shoots or Greater Depression”, Casey
Research, August 2009
29. http://www.concordcoalition.org/
30. http://www.moneyandmarkets.com/
31. Willie, Jim (2009): The Hatrick letter, December 15
32. Allison, Tony (2009): Unlimited Debt: When the glass overflows, we all get wet, July
20, 2009, www.financialsense.com
33. The Bullion Buzz eNewsletter - April 13, 2010,
http://www.bmgbullion.com/document/691
34. Williams, John (2010): http://www.shadowstats.com/alternate_data
35. St. Louis Federal Reserve, http://www.stlouisfed.org/
36. Martenson, Christmas: http://www.chrismartenson.com/
37. Dorsch, Gary (2009): G-20 Inflates the Global Economy to Prosperity, September
11; www.sirchartsalot.com
70
38. Hyperinflation Special Report, www.ShadowStats.com, John Williams, Dec 2, 2009
39. Williams, John: http://www.shadowstats.com/alternate_data
40. Faber, Marc: Editor of “Gloom, Boom, Doom Report”, www.gloomboomdoom.com
41. Russell, Richard: The Dow Theory Letter, www.dowtheoryletters.com
42. See economic review of this book in Rifat al-Iwadhi, 1985, Min Al-Turath al-Iqtisad li
al-Muslimin, p. 245
43. Azam Ibn Abdul-Rahman, Prof. Dr. Zainal Azam (2001):"Currency Fluctuation and its
Effects on Debts and Obligations in Islamic Law", Jul 2001, IKIM Law Journal, Vol. 5,
No. 2, pp.21-38
44. World's mega-rich adding wealth, Carlos Slim No. 1, Reuters - Thursday, March 11,
http://sg.news.yahoo.com/rtrs/20100311/tbs-billionaires-7318940.html?printer=1
45. Hahn, Wilfred (2009): Global Financial Apocalypse Prophecied, 2009, p.252
46. Laetaer, Bernard (2001): The Future of Money, Bernard, Century/Random House
2001
47. http://socioecohistory.wordpress.com/2009/08/12/celente-thesis-war-as-thesolution-to-economic-depression/
48. Thomas H. Naylor, Professor Emeritus of Economics, Duke University
http://vermontrepublic.org/economics-the-abysmal-science
49. Quarterly Trends Journal, June 2009, www.trendsjournal.com
50. Quigley, Caroll (1975): Tragedy and Hope: A History of the World in Our Time
51. Thomson, Ahmed: “Dajjal the Anti-Christ”, revised edition, 2004, Ta-Ha Publishers,
UK, p.56
52. Perkins, John: “Confessions of an Economic Hitman”, 2004, Plume Publishers,
Preface, p. IX
71
Indirect References
1. “The Future of Capitalism – Credit, Lending and Leverage”, McKinsey & Company,
March 2010
2.
“Debt and De-Leveraging – The Great Credit Bubble and Its Consequences”,
McKinsey & Company, January 2010
3.
As-Sufi, Shaykh Abdulqader As-Sufi: ―Technique of the Coup De Banque”, Madinah
Press, 2005
4.
Vadillo, Umar:“The Return of the Islamic Gold Dinar”, Madinah Press, 2004
5.
El Diwany, Tarek:”The Problem with Interest”, Kreatoc, London, 2003
6.
Tarpley, Webster: “Surviving the Cataclysm”, Progressive Press, 2009
7.
Minsky, Hyman: ―Stabilising an Unstable Economy”, 2008, McGraw Hill
8.
Das, Satyajit: “Traders, Guns and Money”, FT Prentice Hall, 2006
9.
El-Erian, Mohammed: “When Markets Collide”, McGraw Hill, 2008
10. De Soto, Jesus Huerta: “Money, Bank Credit and Economic Cycles”, Mises, 2006
11. Kindleburger, Charles and Aliber, Robert: “Manias, Panics and Crash – A History of
Financial Crises”, John Wiley, 2005
12. Batra, Ravi: “Greenspan‟s Fraud – How Twp Decades of His Policies Have
Undermined The Global Economy”, Palgrave McMillan, 2005
13. Duncan, Richard: “The Dollar Crisis – Causes, Consequences and Cures”, John Wiley,
2003
14. Lewis, Hunter: “Where Keynes Went Wrong – And Why World Governments Keep
Creating Inflation, Bubbles and Busts”, Axios, 2009
15. Barton, Dominic, Robert Newell and Gregory Wilson: “Dangerous Markets –
Managing in Financial Crises”, John Wiley, 2003
16. Panzner, Michael: “Financial Armageddon”, Kaplan, 2007
17. Bonner, William: “Financial Reckoning Day”, John Wiley, 2003
18. Prechter, Robert, Jr.: “Conquer The Crash”, John Wiley, 2003
19. Fischer, David Hackett: “The Great Wave – Price Revolutions and the Rhythm of
History”, Oxford, 1996
72
20. Graham, Frank D.: “Exchange Prices, and Production in Hyper-Inflation: Germany
1920-1923”, 1930, re-Print by Mises, 2009
21. Ruppert, Michael: “Confronting The Collapse – The Crisis of Energy and Money in a
Post Peak Oil World”, Chelsea Green Publishing, Vermont (USA), 2009
22. Eggelletian, Andre Michael: “Thieves in the Temple – America Under The Federal
Reserve System”, Milligan Books, LA, 2004
23. Engdahl, F. William: “Full Spectrum Dominance – Totalitarian Democracy in the New
World Order”, Engdahl, 2009
24. Hertz, Noreena: “The Debt Threat – How Debt is Destroying The Developing
World...and Threatening Us All”, Harper Business, 2004
25. Turk, James and John Rubino:‖The Coming Collapse of the Dollar and How to Profit
From It”, Doubleday, Randomhouse, 2004
26. Schiff, Peter, Jr. And John Downes: “Crash Proof – How to Profit from the Coming
Economic Collapse”, 2007
27. McMurtry, John: “The Cancer Stage of Capitalism”, Pluto Press, 1999
28. Chossudovsky, Michel: “The Globalisation of Poverty and the New World Order”,
Global Research (www.globalresearch.ca), 2003
29. Vadillo, Umar:”Esoteric Deviation in Islam”, Madinah Press, 2003
30. Hosein, Imran:”Jerusalem in the Qur‟an”, Masjid Dar Al-Qur‘an, Bay Shore, NY, 2002
31. Kennedy, Margrit:”Interest and Inflation-Free Money – Creating an Exchange
Medium that Works for Everybody and Protects the Environment”, New Society
Publishers, 2005
73
Appendix A – Economics: The Abysmal Science
ECONOMICS: The Abysmal Science95
No academic discipline has ever been so thoroughly discredited in such a
short period of time as has economics over the past year. Virtually no
business, government, or academic economists foresaw what may prove to be
the greatest economic meltdown in history. Even though all of the evidence
points to a major recession, many economists are still in denial as to the
downside risk.
Those employed by the Federal Reserve Bank, the U.S. Treasury, the White
House, the World Bank, and the International Monetary Fund are among the
most inept. They appear to be clueless as to how to deal with the crisis. Then
there are the economists who are reporting for The Wall Street Journal,
Business Week, Fox News, and CNBC who are little more than Wall Street
prostitutes.
Ironically, enrollments in college economics courses have soared over the past
two decades. An economics degree often provided a ticket to Wall Street. How
was it possible for the economics profession to experience such a cataclysmic
failure of insight? The answer is really quite simple. Economics is not a
science but rather a pseudoscience pretending to be a science.
British economist Joan Robinson got right to the heart of the problem in her
1962 book Economic Philosophy when she said, ―Any economic system
requires a set of rules, an ideology to justify them, and a conscience in the
individual which makes him strive to carry them out.‖ In other words,
underlying every sophisticated economic theory and mathematical model lies
a political ideology.
Since the 1980s the prevailing ideology in economics has been the free
market, globalization ideology of University of Chicago economist Milton
Friedman. Although Ronald Reagan popularized this ideology in the 80s, it
was Bill Clinton and his Secretary of the Treasury Robert Rubin along with Fed
Chairman Alan Greenspan who presided over its implementation in the 1990s.
They created a regulatory environment which enabled globalization to thrive.
George W. Bush was little more than a naïve cheerleader for globalization,
who failed to notice when it started to unravel.
The problem of economics according to the high priests of the free market can
be summarized as follows: Given the distribution of income and wealth, how
do we achieve global economic growth in such a manner that we
simultaneously allocate resources worldwide in a socially optimal fashion with
a minimum of interference by government and organized labor? The
underlying premise of this paradigm is that, if consumers, managers,
employees, and stockholders do their own hedonistic thing, their interests will
converge in the long run and society will evolve toward some form of socially
optimal equilibrium. ―This is an ideology to end ideologies,‖ said Joan
Robinson. Tinkering with the distribution of income or wealth is strictly taboo.
So too is questioning the sustainability of never ending economic growth.
The free market, global growth paradigm represents an ideology based on
having – owning, possessing, manipulating, and controlling money, people,
95
Thomas H. Naylor, Professor Emeritus of Economics, Duke University
http://vermontrepublic.org/economics-the-abysmal-science
74
things, places, and even nations. There is absolutely nothing new about
economists providing the economic underpinnings to support the prevailing
ideology. Since the days of Adam Smith, economists have supplied the rich
and powerful with the kinds of answers they wanted to hear. As John Maynard
Keynes once said, ―Practical men are usually the slaves of some defunct
economist. Madmen in authority, who hear voices in the air, are distilling their
frenzy from some academic scribbler of a few years back.‖
Today it is hardly surprising that few economists feel any discomfort
whatsoever in justifying hedonism.
Most of the funding for economic research comes from large corporations and
the federal government, both of whom have a strong vested interest in
promoting greed so that the economy does not collapse. While posing as
objective social scientists, all too many economists are willing to sell their
souls to the highest bidder.
During the 1990s Wall Street economists and financial analysts created the
ultimate, free market, global, money-making machine. Designed to minimize
public scrutiny, government regulation, and the possibility of prosecution, this
Frankenstein-like monster consisted of a complex international network of
hedge funds, derivative contracts, credit default swaps, and exchange-traded
funds all based on sophisticated mathematical models. The greed driven maze
was supported by a network of interconnected financial institutions linking
every country to every other country and everyone to everyone else. It was
so complex that literally no one understood how the separate components fit
together. Now that the system is broken, neither Wall Street, the Fed, nor the
Treasury knows how to fix it. It was simply too big, too unwieldy, too
inflexible, and too conducive to mismanagement and fraud to survive.
Many believe that the meltdown of the U.S. economy was caused by too much
credit and too much easy money. Yet the government‘s strategy for dealing
with the problem seems to be more of the same. Thus far none of the
government‘s bail-out strategies or stimulus packages seem to be working.
Printing money like it was going out of style will not fix the U.S. economy. If
China or Japan pulls the plug on their investments in U.S. Treasury bonds, the
U.S. government could become insolvent.
Economics has long been known as the ―dismal science.‖ We believe this is a
complete misnomer. Economics as practiced in the United States today is no
science at all, but rather a political ideology disguised as a science. Economics
is the ―abysmal science,‖ and that‘s a problem for all of us.
As if to prove the abysmality of it all, ―More than 90 percent of economists
predict the recession will end this year. That assessment came from leading
forecasters in a survey by the National Association for Business Economics,‖
reported USA Today, 27 May 2009.
These very same ―leading forecasters‖ who struck out in 2007, predicting that
America would escape recession, were at bat again in 2009, predicting an end
to what they didn‘t see coming.
75
Appendix B – Three Global Growth Scenarios
Three economic scenarios, one constraint: debt!96
Past crises, including the explosion of the dotcom bubble, have had greater
repercussions on developing economies. In this the first global recession, with, as
mentioned, significant transfer of wealth towards emerging markets, it is evident
that the advanced economies economic model is flawed – and fundamental
problems stemming from the lack of income parity and population demographics
are preventing a consumption-led recovery. Given the debt problems the Western
world is facing, we have focused our research on the different economic scenarios
for the next two years and their implications for asset class allocation. Three
scenarios – Decline, recovery or growth?
Bear scenario
Our bear scenario suggests we would enter a deflationary spiral as high
unemployment and low consumption drive prices ever lower. A second round of
home foreclosures in the US would lead to further write-downs on bank balance
sheets, and even more government public deficits as the debt transfers from
financial institutions to the state through more rescue packages.
Under this scenario, the central banks would adopt a method such as that used by
the Japanese in 1990, reducing interest rates to 0% to battle with deflation, and
they would continue using unorthodox monetary policy such as quantitative easing
to replace capital destruction. Avoiding depression is the focus here, though a long
and arduous recession can be expected under the bear scenario. But keep in mind
that more public debt will reduce room for manoeuvre, as well as being a source of
future problems. In other words, the consequence, as with the other two scenarios,
is high government deficits.
96
―Worst-case Debt Scenario‖, Client Report, Societe Generale, November 2009, p. 27
76
Central scenario
Our central scenario sees a stabilisation in 2009, with several corrections in
financial markets as economic ‗green shoots‘ exaggerate the good news factor from
beating expectations. The current deleveraging of financials looks set to have
strong and long lasting implications on macroeconomic indicators as GDP growth
will likely be limited due to continued balance sheet tightening and restrictions on
lending. High levels of unemployment are continuing to take a toll on consumer
finances and investment sentiment. But we may see a stabilisation in
unemployment figures, and further improvements could confirm that the worst is
behind us. However, even as we come out of the recession, governments will be
carrying excess debt rescued from financials.
Bull scenario
Under our bull scenario, we would see a rapid recovery following the rapid
descent, combined with inflation as we come out of the recession. The US and
emerging markets would return to growth in 2010, leaving Europe to recover
shortly thereafter. The combination of growth and inflation would help reduce
debt by between 5% and 10% per year. Even under our bullish scenario, debt
would be hard to handle, with interest rates dictating how much debt to
erase, but also the cost of servicing the debt. This is why we believe there is
no easy road to recovery.
77
Appendix C – Trends Journal on US Economy and Politics
Here is what Trends Journal had to say about the state of the US Economy and politics97:
Publisher’s Note: A function of the Trends Journal® and the motto of The
Trends Research Institute is ―Think for Yourself.‖ It sounds easy, but it takes
will, knowledge and courage. The will to seek, the knowledge to support
convictions, and the courage to challenge conventional wisdom, popular
opinion and authority.
Parents, education and peer pressure have all combined to condition us. In
order to think for ourselves, we must first recognize the extent to which we
have been, and continue to be, conditioned.
We‘ve been taught to think that esteemed economists with intimidating titles
from prestigious universities know more about the world of business than
anyone else. But, as Thomas Naylor has so ably argued, their abject failure to
forecast the worst economic crisis since the Great Depression and its ongoing
implications should make anyone an economic agnostic, if not an atheist.
The crisis that began with the ―Panic of ‗08‖ was unlike anything that anyone
alive had ever experienced. In 2012, it should now be self evident that the
broad range of academic, government and media experts did not have the
foresight to see what was coming, and therefore should not have been trusted
to predict either what would come, or what remedies to prescribe.
The economic future being shaped had little to do with economic formulas,
principles, algorithms or theories. It had to do with connections; who knew
whom. As we had written in our Trend Alert® months before Election Day
(see page 6), ―The Wall Street Gang was running the White House.‖
Financiers and politicians controlled the nation‘s purse strings, and every
move they made
was designed to enrich and empower themselves under the pretext of helping
Mr. and Ms. Average American.
NEW YORK FED CHAIRMAN’S TIES TO GOLDMAN RAISE QUESTIONS
The Federal Reserve Bank of New York shaped Washington‘s response to the
financial crisis late last year, which buoyed Goldman Sachs Group Inc. and
other Wall Street firms. Goldman received speedy approval to become a bank
holding company in September and a $10 billion capital injection soon after.
During that time, the New
Goldman‘s board and had a
Goldman‘s new status as a
Reserve policy. (Wall Street
York Fed‘s chairman, Stephen Friedman, sat on
large holding in Goldman stock, which because of
bank holding company was a violation of Federal
Journal, 4 May 2009.)
―Raise questions,‖ reads the WSJ headline. What questions? It couldn‘t be
more blatant. Just follow the money. During the Bush years it was the military
industrial complex. Billions in no-bid contracts went to firms with inside
connections. During the Obama regime it would be the Financial Mafia. Billions
would be directly deposited into banks and brokerages of white-shoe Wall
Street insiders.
97
Quarterly Trends Journal, June 2009, www.trendsjournal.com
78
Either way, Halliburton, Kellogg Brown & Root, Lockheed Martin — Citigroup,
Bank of America or Goldman Sachs — the bottom line was the same:
American taxpayers would have to foot the bill.
From Bubble to Bubble to Bubble The printing presses never stopped. Trillions
of dollars backed by nothing were magically manufactured. The US
government assumed nearly a trillion dollars of debt by mid-fiscal year 2009.
It issued $3.25 trillion worth of Treasuries (nearly four times more than
floated in 2008), and would chalk up a fiscal deficit equal to 12.9 percent of
its GDP. Over the next decade, US interest payments on debt would more
than quadruple. How this would be paid was a question cursorily addressed
and more often postponed.
It was a new variation of the familiar ―bubble‖ scheme, but it was the same
old song. The melody line went like this: back in March of 2000 the dot-com
bubble burst, wiping out $5 trillion in market value. Recession followed.
Rather than let speculators pay for their gambling excesses and swallow their
hi-tech losses, the Boys at The Bank, headed by Federal Reserve Chairman
Alan Greenspan, created another bubble. This time it was the real estate,
leveraged-buyout and merger-and-acquisition bubble. Beginning in 2001, the
Fed began flooding the markets with cheap money. With easy access to low
interest loans, developers, speculators and consumers went on a borrowing,
building and spending spree.
If you were tracking trends, looking at facts for what they were and not what
you wanted them to be, you would have known the outcome in advance. Like
all bubbles, it was doomed to burst. As the real estate market sizzled, we
went on record to forecast fizzle. Low interest rates would devalue the dollar.
In order to prop it up, the Fed would have to raise rates. High interest rates
was the pin that would pop the bubble:
―The real recession antidote was the 46-year low interest rates that set the
real estate market on fire and sparked the easy money re-financing boom
that led homeowners to tap the equity in their homes, lower monthly
payments and go on a spending spree. Pure and simple, it was an interest
rate recovery brought on by 13 rate cuts.
(―Real Estate Fizz,‖ Trends Journal®, December 2004.)
Most who played the game knew the rules. The bubble was not sustainable.
But with big money being made, properties being flipped like flapjacks, and
real estate prices booming, the players would not face the consequences.
As we wrote:
―Similar to the 1929 stock market crash story of Joseph Kennedy knowing it
was time to sell when the shoeshine boy gave him stock tips, now legions of
job-seeking unemployed have become real estate agents and mortgage
brokers, while novice speculators flip properties … all hoping to turn a quick
buck.‖ (―Real Estate Fizz,‖ Trends Journal®, December 2004.)
At the onset of the ―Panic of ‗08,‖ the Boys at The Bank did it again. With
credit lines blocked and equity markets diving, rather than let the biggest
speculators eat their losses, the Fed flooded the marketplace with cheap
money. But even all-time low interest rates would not staunch the cascade of
failing market sectors. Washington stepped into what had formerly been the
79
sacrosanct realm of private enterprise. Trillions of taxpayer dollars were
pumped into businesses deemed ―too big to fail.‖
A new, unthinkable, unimaginable, unfathomable, unprecedented chapter in
American history was written.
A new bubble was created; a bubble bigger than all the bubbles ever blown.
And when it blew…
The ―Bailout Bubble‖ —The Bubble to End All Bubbles
KINGSTON, NY, 13 May 2009 — The biggest financial bubble in history is
being inflated in plain sight, said Gerald Celente, Director of The Trends
Research Institute. ―This is the Mother of All Bubbles, and when it explodes,‖
Celente warns, ―it will signal the end to the boom/bust cycle that has
characterized
economic activity throughout the developed world.‖
Either unwilling or unable to call the bubble by its proper name, the media,
Washington and Wall Street describe the stupendous government
expenditures on rescue packages, stimulus plans, buyouts and takeovers as
emergency measures needed to salvage the severely damaged economy.
―All of this terminology is econo-babble,‖ said Celente. ―It‘s like calling torture
‗enhanced interrogation.‘ Washington is inflating the biggest bubble ever: the
‗Bailout Bubble.‘
―This is much bigger than the Dot-com and Real Estate bubbles which hit
speculators, investors and financiers the hardest. However destructive the
effects of these busts on employment, savings and productivity, the Free
Market Capitalist framework was left intact. But when the ‗Bailout Bubble‘
explodes, the system goes with it.‖
The economic framework of the United States has been restructured. Federal
interventionist policies have given the government equity stakes, executive
powers and management control of what was once private enterprise. To
finance these buyouts, rescue and stimulus packages — instead of letting
failed businesses fail and bankrupt banks and bandit brokerages go bankrupt
— trillions of dollars are being injected into the stricken economy.
Phantom dollars, printed out of thin air, backed by nothing ... and producing
next to nothing ... defines the ―Bailout Bubble.‖ Just as with the other
bubbles, so too will this one burst. But unlike Dot com and Real Estate, when
the ―Bailout Bubble‖ pops, neither the President nor the Federal Reserve will
have the fiscal fixes or monetary policies available to inflate another.
With no more massive economic bubbles available to blow up, they‘ll set their
sights on bigger targets. ―Given the pattern of governments to parlay
egregious failures into mega-failures, the classic trend they follow, when all
else fails, is to take their nation to war,‖ observed Celente.
Since the ―Bailout Bubble‖ is neither called nor recognized as a bubble, its
sudden and spectacular explosion will create chaos. A panicked public will
readily accept any Washington/Wall Street/mainstream media alibi that shifts
the blame for the catastrophe away from the policy makers and onto some
scapegoat.
80
―At this time we are not forecasting a war. However, the trends in play are
ominous,‖ Celente concluded. ―While we cannot pinpoint precisely when the
‗Bailout Bubble‘ will burst, we are certain it will. When it does, it should be
understood that a major war could follow.‖
But the future would be postponed, as money pumped over the arid financial
fields forestalled the inevitable. Financial botanists bedazzled investors and
charmed the general public with authoritative ―green shoot‖ descriptions and
analyses:
-
The frozen credit markets had thawed
Shares of financial companies climbed sharply
Mortgage refinancing had soared in the US
Absent were explanations of how and why these developments would lead
to long-term growth and productivity.
The credit market thaw was a result of trillions of bailout dollars, taken from
taxpayers, allocated to keep troubled banks afloat.
The shares of financial companies spiked because they were showered with
free taxpayer money to cover their losses … or to gamble with.
With interest rates at historic lows, millions of people were refinancing
mortgages to decrease monthly payments rather than use the equity to buy
second homes, make improvements, buy cars, go on vacations or retail
spending sprees … as they had done in the past.
These and other indicators of recovery were, without exception, both shortterm and illusory.
―Green shoots‖ had replaced ―Change we can believe in‖ as the new selfhypnotizing slogan protecting Americans from any contact with reality. And it
worked.
With strong public approval ratings 100 days into his presidency, Obama
radiated confidence. Preaching faith in economic revival, the President
proclaimed that his $787 billion stimulus plan, $700 billion bank
recapitalization, $70 billion to rescue and take over auto companies, and
billions more to other failing industries, ―were starting to generate signs of
economic progress.‖
Justifying the record deficits his plans generated, Mr. Obama asserted, ―The
last thing a government should do in the middle of a recession is to cut back
on spending.‖
Really? Why wasn‘t it ―the first thing a government should do‖? Cutting back
was precisely what America, for decades, had been forcing on other countries
that had over-borrowed and over-spent themselves into analogous economic
crises. In a stroke of magisterial hypocrisy, the crippling austerity measures
America had demanded of others did not apply at home.
Regardless of who was President, opposition came with the office. Polls have
shown that a solid third of voters will oppose whoever is President no matter
how well he performs, while another third will support him no matter how
badly he performs.
81
Therefore, it was conveniently taken for granted by a media majority that the
driving force behind the tax protests and tea parties came from the
predictable opposition third, characterized as a consortium of paranoid
rightwing nuts, Republican diehards, and assorted fringe elements.
Rather than acknowledge the movement as a valid indicator of much broader
public sentiment, it was written off with a smirk and a shrug, as a blip, a fad,
a Fox News production. Delighting in double entendres on ―tea bagging,‖
broadcast personalities and pundits reduced the protests to prankery.
It was no such thing. It was a voice that cut across party lines, and ignoring it
would prove to be a big mistake. According to the White House, ―The
President was unaware of the tea parties.‖ Later, made aware in a ―Let them
eat cake‖ moment, President Obama would dismiss the protests as
―unhealthy.‖ The movement was not to be ridiculed or ignored out of
existence. History was being made. No living American had ever witnessed
such widespread tax protests.
However underreported, the 500 protests and tea parties held throughout the
nation on April 15th, 2009 can now, in 2012, be recognized as the opening
salvo of ―The Second American Revolution.‖ That groundswell of
disenchantment was not confined between party lines or locked in rigid
ideology. Intelligent citizens everywhere were outraged at being forced to foot
the bill for the trillions in government rescue packages, while property,
school, and a wide variety of sales, license fee and hassle taxes were
dramatically raised or newly levied.
Predictably, the media was missing the trend, as was the White House. A year
and a half before the first tea party, The Trends Research Institute had
forecast ―Tax Revolts‖ would be a major trend. (See ―Tax Revolts,‖ Top
Trends 2008, Trends Journal®, December 2007).
The protests had been long in the making and had next to nothing to do with
President Obama. They were not a right wing GOP movement. We had
forecast a tax revolt movement when George W. Bush was President.
As we wrote, the protests were a reaction by the ―Coalition of the Cash
Strapped‖ being taxed to death. It was clear and straightforward. People were
taking to the streets because they couldn‘t make ends meet. The vast
majority was not prompted by political agenda or ideology. Saddled with $14
trillion in debt, out of work, under-employed, wages declining, homes being
foreclosed at record rates and down on their luck, growing legions couldn‘t
pay existing bills, let alone pay more taxes.
Others, who had thought their financial futures were secure, saw household
wealth fall $8.5 trillion and real estate values fall by $2.5 trillion between
2008 and 2009. What would it take to get these facts and their indisputable
implications into the media‘s head?
Yes, federal taxes played a role in the tax revolts. There was widespread
outrage at taxpayer financed bailouts, buyouts and rescue packages that fell
on taxpayer shoulders. There was disgust with paying exorbitant salaries to
executives responsible for the failures. Even so, the tea party spark was not
lit by Washington. While these grievances were real and did, to some extent,
act as galvanizing forces, they were, in a sense, abstract. Those immense
Beltway/Wall Street bills would only come due in the future.
82
But in 2009, what most infuriated the populace were the state and local tax
increases at a time when the great majority were least capable of supporting
them. And despite all the talk about ―green shoots‖ sprouting across the US
landscape, the economy would continue to wither, and so too would tax
revenues. It was a vicious cycle. As tax revenues declined, new tax schemes
to squeeze the ―little people‖ were invented, and old ones expanded.
Empire America Fading Fast
Back in 2002, we forecast that, based on a confluence of emerging trends, not
only was the consumer-based US economy unsustainable, Empire America
itself would dissolve. (See ―Empire America Fading Fast,‖ Trends Journal®,
Fall 2002.)
In 2009, this was no longer a forecast, it was fact. You only had to do the
math. Federal obligations were at an astounding and irreconcilable $546,000
per household. Not only was it impossible to pay off the debt given the
direction the government was going — printing phantom money, out of thin
air, based on nothing and producing practically nothing — the debt was
foreordained to increase. 2008 tax revenues had plunged 34 percent, and
they would plummet further as ―The Greatest Depression‖ set in. Added to
the debt load were the unavoidable trillions committed to cover
Medicare/Social Security/retirement programs for 78 million aging baby
boomers.
Those were the inescapable, undeniable numbers. They didn‘t lie. But not
only were they not being added up, they were invisible: ―US hopes of ‗green
shoots‘ lift confidence,‖ read the 26 May 2009 Financial Times headline.
The following is a quote from foremost Trends Forecaster (Gerald Celente) in the World
who has been very accurate about his forecasts since 1980 from stock market crash of
1987, dotcom bubble and first terrorist attack:
“Given the pattern of governments to parlay egregious failures into megafailures, the classic trend they follow, when all else fails, is to take their nation
to war.”98
98
Gerald Celente, Director, Trends Journal Institute, www.TrendsResearch.com
83
Appendix D – Wealth Concentration amongst 1,011
billionaires
World's mega-rich adding wealth, Carlos Slim No. 199
Reuters - Thursday, March 11
* Billionaires worth $3.6 trillion, up from $2.4 trillion
* Numbers up from 2009, but still short of 2008
* Only second time in 16 years Bill Gates out of top spot
By Michelle Nichols
NEW YORK, March 10 - Mexican tycoon Carlos Slim is the world's richest
person, knocking Microsoft <MSFT.O> founder Bill Gates into second spot, as
the wealth of the world's billionaires grew by 50 percent over the last year,
Forbes magazine said on Wednesday.
It is only the second time
magazine said, estimating
compared to Gates's $53
<BRKa.N> came in at No. 3
since 1995 that Gates has lost the crown, the
Slim's net worth <AMX.N> at $53.5 billion,
billion fortune, while investor Warren Buffett
with $47 billion.
The trio regained $41.5 billion of the $68 billion they had lost the previous
year, Forbes said.
The number of billionaires around the world has nearly recovered in 2010
after dropping by a third last year during the global financial crisis. There are
now 1,011 billionaires, compared with 793 last year and 1,125 in 2008.
The net wealth of those billionaires grew to $3.6 trillion from $2.4 trillion last
year, but is still down from 2008's $4.4 trillion, according to the 24th annual
Forbes list, which took a snapshot of wealth on Feb. 12 to compile its ranking.
The average billionaire is now worth $3.5 billion, up $500 million from last
year. And the number of women on the list rose to 89 from 72 last year.
"The global economy is recovering and it's reflected in what you see in the list
this year," Steve Forbes, chief executive of Forbes, told a news conference.
"Financial markets have also made an even more impressive comeback from
the lows of just about a year ago, particularly in emerging markets."
"Asia is leading the comeback," Forbes said.
The number of billionaires in the Asia-Pacific region grew by 80 percent to 234
and their net worth almost doubled to $729 billion, which the Forbes ranking
99
http://sg.news.yahoo.com/rtrs/20100311/tbs-billionaires-7318940.html?printer=1
84
attributed to the area's "swelling stock markets and several large public
offerings during the past year."
Two Indians round out the top five richest people in the world -- Mukesh
Ambani, with a petrochemicals, oil and gas fortune of $29 billion, and steel
magnate Lakshmi Mittal, who is valued at $28.7 billion.
The biggest gainer on the list was Brazilian mining <MMXM3.SA> magnate
Eike Batista, 53, with $27 billion, up from $7.5 billion. He made his riches
through the initial public offerings of several companies. He is planning to
take his shipbuilding and oil services firm OSX public next week in an
expected $5.6 billion offering, which would be Brazil's second biggest ever
IPO.
UNITED STATES, EUROPE LAGGING
Of the 97 billionaires making their debut on the Forbes list, 62 are from Asia,
while for the first time China is now home to the most billionaires outside of
the United States.
"The United States still dominates, but the United States is lagging," Forbes
said. "It is not doing as well as the rest of the world in coming back."
"The global boom that we experienced from the early 80s ... which was
temporarily derailed in 2007, now looks like it is beginning to get back on
track. But Asia and a handful of others are surging, relatively the United
States and Western Europe are lagging."
The top homes to billionaires are New York with 60 and Moscow with 50,
followed by London with 32.
There are 55 countries represented on the Forbes list with billionaires from
Pakistan -- clothing exporter Mian Muhammad Mansha -- and Finland -manufacturing mogul Antti Herlin -- making an appearance for the first time,
while Turkey, Russia and India regained billionaire numbers lost last year.
There were 164 billionaires returning to the list in 2010, including Facebook
founder Mark Zuckerberg, who is also the world's youngest with a $4 billion
fortune at the age of 25.
The second-youngest self-made billionaire is Japan's Yoshikazu Tanaka, 33,
who made $1.4 billion from social networking firm Gree <3632.T>. The oldest
is 99-year-old Walter Haefner from Switzerland who has $3.3 billion.
The sixth-richest man is Oracle Corp <ORCL.O> Chief Executive Larry Ellison
with $28 billion. At No. 7 is the richest man in Europe, Bernard Arnault, CEO
of luxury goods group LVMH <LVMH.PA>, who has a fortune of $27.5 billion.
"The bling is back," said Forbes Senior Editor Luisa Kroll of Arnault's wealth.
Rounding out the top 10 is Spanish clothing retailer Inditex <ITX.MC>
founder Amancio Ortega with $25 billion and German supermarket king Karl
Albrecht, who is valued at $23.5 billion.
85
While Gates's and Buffett's fortunes far exceed most others in the top 10,
Forbes Senior Editor Matthew Miller said their fortunes would be far greater if
they hadn't given away a lot of their money.
"They would be far richer today if it wasn't for their tremendous
philanthropy," he said. "Buffett would be worth at least $55 billion ... and
Gates' net worth would exceed $80 billion had it not been for his
philanthropy."
The Forbes ranking of the world's billionaires can be seen at
www.forbes.com/billionaires. (Additional reporting by Elzio Barreto; Editing by
Mark Egan and Eric Walsh) (For a list of the top 20 click [ID:nN10142112]
(For a newsmaker story on Carlos Slim click [ID:nN10147269] and for a
factbox on Slim [ID:nN10139746]
Copyright © 2010 Yahoo! Southeast Asia Pte. Ltd. (Co. Reg. No.
199700735D). All Rights Reserved.
86
Appendix E – Stages of Deflation and K-Cycle
Surely Winter (Kondratieff Winter or K-Winter) Follows Autumn
Below are the stages of deflation:100

Rising productivity and rampant credit expansion led to massive overcapacity

Global wage arbitrage is putting downward pressure on wages and benefits

An enormous bubble in credit lending developed, causing malinvestments and
speculation

Speculative credit lending fueled bubble prices in houses and other assets, including
the stock market

At some point, housing prices will fall as the pool of stupid buyers exhausts itself.
The housing sector will stall

A stalled housing sector will cause rising unemployment and lower demand for goods
and services, appliances, eating out, etc., etc., etc

Bankruptcies will rise

Banks will not be willing to extend further credit on assets declining in value,
especially to those out of work or nearly underwater on their homes. In fact,
appraisals will get tighter at long last

Credit lending will plunge. We have already seen the second consecutive month of
declining consumer credit. This is the first time since 1992. There is every reason to
believe a reversal is under way. If not now, then soon

Bankruptcies, falling asset prices, and people walking away from mortgage loans is a
destruction of credit

If credit counted as inflation on the way up, a destruction in credit MUST be counted
as deflationary on the way down
100
Shedlock, Michael (2005): K Cycle Trends
http://globaleconomicanalysis.blogspot.com/2005/07/great-flation-debate-whats-coming-and.html
87
88
Appendix F – There is an Elite Cabal
In Tragedy and Hope, Prof. Carroll Quigley exposed the role of International Banking
cabal behind-the-scenes in world affairs. Prof. Quigley had this to say about the banking
cabal:
―Ladies and gentlemen, the institution of Central Banking as it is known today
has but one commodity it ‗peddles‘ to the world – namely, IRREDEEMABLE,
UNBACKED FIAT MONEY. The very nature of irredeemable fiat money regimes
– where money is ‗lent‘ into existence with compound interest – is that they
are inherently unstable. Fiat money regimes owe their instability to the fact
that their growth curves are, by definition, exponential.‖
―The powers of financial capitalism had another far reaching aim, nothing less
than to create a world system of financial control in private hands able to
dominate the political system of each country and the economy of the world
as a whole. This system was to be controlled in a feudalist fashion by the
central banks of the world acting in concert, by secret agreements, arrived at
in frequent private meetings and conferences. The apex of the system was
the Bank for International Settlements in Basel, Switzerland, a private bank
owned and controlled by the worlds‘ central banks which were themselves
private corporations. The growth of financial capitalism made possible a
centralization of world economic control and use of this power for the direct
benefit of financiers and the indirect injury of all other economic groups.‖ 101
The following excerpt is from a letter from the London branch of the banking firm
of Rothschild Brothers, dated 25 June 1863 and addressed to the New York bank of
Ickleheimer, Morton and Van der Gould – which was quoted by Ezra Pound in his
writings, and which gives some indication of both the nature and identity of iceberg
of the institutionalised usury which has so deeply affected the characteristics and
quality of life in the twentieth century.
―The few who understand the system...will either be so interested in its
profits, or so dependent on its favours, that there will be no opposition
from that class, while, on the other hand, the great body of people,
mentally incapable of comprehending the tremendous advantages that
Capital derives from the system, will bear its burden without complaint, and
perhaps without even suspecting that the system is inimical to their
interests...‖102
It can be concluded from the above quote that from the inception of the ribabased
101
102
system
there
were
people
who
knew
the
benefits
of
this
form
of
Quigley, Caroll (1975): Tragedy and Hope: A History of the World in Our Time
Thomson, Ahmed, “Dajjal the Anti-Christ”, revised edition, 2004, Ta-Ha Publishers, UK, p.56
89
economic/financial system.
Thus these elite have pushed these agenda through their
institutions of injustice such as central banks, credit-creating money-centre banks, and
their global institutions such as BIS, IMF and World Bank.
As if that was not enough the people in developing countries have been
impoverished further by currency debasement, debt crises and international intrigue
as proven by the following quote from the book titled, ―Confessions of an Economic
Hitman‖103:
―Economic hit men (EHM) are highly paid professionals who cheat countries
around the globe out of trillions of dollars. They funnel money from the World
Bank, The US Agency for International Development (USAID), and other
foreign ―aid‖ organisations into the coffers of huge corporations and the
pockets of a few wealthy families who control the planet‘s natural resources.
Their tools include, fraudulent financial reports, rigged elections, payoffs,
extortions, sex, and murder. They play a game as old as empire, but one that
has taken on new and terrifying dimensions during this time of globalisation.
I should know; I was an EHM.‖
103
Perkins, John, “Confessions of an Economic Hitman”, 2004, Plume Publishers, Preface, p. IX
90
Appendix G – Central Banks Stoking Market Euphoria
Gary Dorsch, SirChartsAlot, Inc. | April 15, 2010
http://financialsense.com/fsu/editorials/dorsch/2010/0415.html
With only the slightest degree of hesitation, the Dow Jones Industrials
penetrated the psychological 11,000-level this week, extending its historic
gains to +70% above its March 2009 lows, and melting away deep-seeded
skepticism over whether equities have gone ―too-far, too-fast,‖ in what is the
least-loved bull market in history. Yet the bearish skeptics might want
tojudge the outlook for the US-economy through the lens of the stock
market, rather than vice versa.
Just as the decimation of global stock markets in late 2008, erasing $30trillion in market capitalization from the peak in October 2007 was an
accurate predictor of just how severe the economic recession would be,
conversely, the V-shaped recovery rally since March 2009, recouping more
than $15-trillion of market value, is signaling a robust rebound in the global
economy. China is the locomotive that‘s pulling the global economy, leading
the way at a blistering +12% clip in Q‘1, 2010.
While a tsunami of money injections by the G-20 central banks initially fueled
the stock markets‘ historic advance, further gains must be earned the oldfashioned way, - through a solid recovery in revenues and earnings. On Wall
Street, S&P-500 profits are expected to rebound +37% from a year ago, and
so far, that‘s looking like a conservative estimate. There‘s been better-thanexpected numbers by cyclical bellwethers such as CSX Railroad, Intel, UPS,
and JP-Morgan, and Fed chief Ben ―Bubbles‖ Bernanke and his band of superdoves, have reiterated that they‘ll keep short-term rates locked at zero
percent for an ―extended period‖ of time.
The Fed has its foot pressed firmly on the monetary accelerator, and driving
recklessly over the speed limit, favoring faster growth over fighting inflation,
91
in order to insure a sustainable recovery that can lead to a noticeable decline
in the 9.7% jobless rate. The Fed believes it can help the economy to create
new jobs, by simply printing money and stoking euphoria and speculation in
the stock market.
News that US-employers added 162,000-jobs in March was one of the most
encouraging signs that the Fed‘s radical ―quantitative easing‖ (QE) scheme is
bearing fruit. With job creation strengthening, US-businesses have restarted
to rebuild inventories from record low levels, and according to the Purchasing
Manager‘s Index, orders for US-exports soared to its highest level in 21years. Retailers reported growth in sales across a broad spectrum of
categories.
Behind the scenes, the Fed has kept the stock market rally intact, by
funneling $1.75-trillion into the coffers of the Wall Street Oligarchs, and
locking down short-term interest rates at zero-percent. Banks have funneled
the Fed‘s high-powered money into high-grade corporate (LQD), and junk
bonds (JNK, HYG), making the stock market look more attractive. In turn,
ultra-low bond yields have prevented any meaningful decline in the stock
market, and fueled a parabolic V-shaped recovery. In the next phase of the
rally, otherwise cautious investors typically capitulate, by returning to the
equity markets, and buying stocks at marked-up prices.
Alongside the booming stock markets, - industrial commodities are also
responding to stronger economic growth in China, India, Brazil, and other
emerging nations. Speculators are re-engaging the ―yen carry‖ trade, and
funding their purchases of industrial commodities at ultra-low interest rates of
0.1%, financed by Japanese brokers. China‘s voracious demand for crude oil,
aluminum, iron-ore, copper, and rubber, showed no let-up in March, with
imports rising rapidly despite higher prices paid by factories returning to work
after the long Lunar New Year holidays.
Chinese crude oil imports jumped to 5-million barrels per day in March, their
second-highest monthly level on record, and 29% higher than a year ago.
Imports of copper surged to 456,000-tons, up 22% from a year ago. Traders
92
estimate that the amount of copper in Shanghai warehouses is bulging at
200,000-tons, twice February‘s level. China even recorded a trade deficit of
$7.2-billion in March, the first gap since April 2004, with imports surging
+66% higher from a year ago.
Global crude steel production rose to 108-million tons in February, up 24%
from a year earlier, with nearly half the world‘s steel output emanating from
China. Capacity utilization for steelmakers worldwide rose to 79.8%, a 15month high and 12% higher than a year ago. Iron-ore, used in making steel,
skyrocketed on the Chinese spot market to $167 /ton last week, nearly
tripling above last year‘s low. The price of DRAM computer chips in Taiwan
have also tripled from a year ago.
The explosive rallies in key raw materials, utilized by factories, poses a major
inflationary threat to big importers such as China and India, where food and
energy account for more than half of the average household budget. So far,
the central banks of China and India are still favoring faster growth, over
combating inflationary pressures. India‘s wholesale price index is 10% higher
than a year ago, and the Bank of India is expected to hike its cash rate a
quarter-point to 6% next week.
Despite growing signs of a rebounding US-economy, and healthy profit growth
for S&P-500 companies, the propaganda artists hired by the Federal Reserve,
continue to paint a gloomy picture of the economy in the media. Fed officials
are aiming their gloomy rhetoric at the bond market however, as part of a
brainwashing operation, working to keep bond yields locked at artificially low
interest rates.
―There are a lot of people who are unemployed. There are a lot of factories
that are not producing at full steam, so we have excess slack. There is little
inflationary pressure in the economy that is operating well below its
potential,‖ said Dallas Fed chief Richard Fisher, on April 13th. ―The pain is still
with many of us to be sure, and we are a long way from a full recovery,‖
added Richmond Federal Reserve Bank Jeffrey Lacker. But there is no pain on
93
Wall Street. In fact, the hallucinogenic side effects of QE have made any
attempt at short-selling the stock market, as futile as trying to submerge a
helium filled balloon under water.
In the United States, the Dow Jones Commodity Index is hovering +20%
higher than a year ago, an early warning signal that inflation will accelerate in
the months ahead, regardless of what government apparatchiks say. In
theory, signs of a rebounding economy, accompanied by higher commodity
prices, should lead to higher Treasury bond yields. But in reality, that hasn‘t
been the case. Instead, the Fed has demonstrated its mastery over the
Treasury bond market, by locking longer-term bond yields within narrow
trading ranges, thru jawboning and stealth QE.
As the Dow Jones Industrials blasts thru the psychological 11,000-barrier, and
the S&P-500 Index climbs through the 1,200-level, Fed officials are aware
that the stock market rally could short-circuit, and fizzle-out, if Treasury
yields are allowed to climb above key resistance levels. Another threat to the
stock market, is a possible ―Oil Shock,‖ as crude oil prices surged to
$86/barrel this week.
Last week, when the US Treasury‘s 10-year yield briefly climbed to 4-percent,
a key resistance level, the Fed covertly intervened at the weekly T-note
auction, disguised as an indirect bidder, to knock yields lower. Keeping a lid
on the pressure cooker is essential, to keeping the euphoria on Wall Street
intact. A record 4-to-1 cover at the 10-year auction, convinced short sellers in
Treasury notes to scramble for cover, out of fear of the magical powers of the
―Plunge Protection Team,‖ (PPT).
Former Fed chief ―Easy‖ Al Greenspan warned on March 27th, that if the Fed
and the Treasury want to avoid trouble in the stock market, the 10-year Tnote yield should be capped at 4-percent. ―If the 10-year yield begins to move
aggressively above 4%, it‘s a signal that we are in difficulty. There is basically
this huge overhang of federal debt, - never seen before. It‘s going to have a
marked impact eventually unless it is contained, on long-term rates. That will
94
make a housing recovery very difficult to implement and dampen capital
investment,‖ he warned.
Just hours before the ten-year and thirty-year Treasury auctions, Fed chief
Ben ―Bubbles‖ Bernanke, tried to reassure skeptical foreign central banks that
the US-budget deficit would not lead to higher inflation. ―Inflation is not really
the issue here, because the Federal Reserve is not going to monetize the
government debt,‖ Bernanke said. China was a net seller of $61-billion of US
Treasury notes over the past four-months, but cash rich buyers from the
United Kingdom, picked-up the slack, purchasing nearly $125-billion during
the same time period.
At the same time however, ―Bubbles‖ Bernanke is playing a shell game, by
jigging-up the stock market to sharply higher levels, with ultra-low interest
rates. ―The Fed has stated clearly that it anticipates that extremely low rates
will be needed for an extended period,‖ Bernanke told the Joint Economic
Committee, touching-off a wild buying frenzy on Wall Street. At the same
time, primary bond dealers are loathe to lift the Treasury‘s 10-year yield
above 4%, without the Fed‘s permission, reckoning the central bank would
intervene again, to put a lid on yields.
―If huge amounts of government borrowing push-up bond yields
would the Fed then step in and buy a bundle of Treasuries just to hold
rates down? I think not,‖ declared Dallas Fed chief Richard Fisher on
March 27th. ―Monetizing the debt via Fed purchases of government
bonds, inevitably leads to hyperinflation and economic destruction,
and the central bank will not be complicit in that action, if it were
pressured to do so,‖ Fisher said. ―The markets, fearing the consequences
of runaway deficit financing, have bid-up longer-term nominal rates, resulting
in a yield curve that is now historically steep. Some of this might reflect an
improvement in economic growth, but we cannot turn a blind eye to the effect
that growing government indebtedness has on confidence and Treasury
yields,‖ he added.
95
Traders have bid-up the price of gold, to as high as $1,155 /oz this week,
seeing thru the haze of the Fed‘s smoke and mirrors. The fact is, the Fed has
already monetized trillions of dollars of new supply, through its QE scheme,
and many investors have lost all faith in the anti-inflation resolve of the G-20
central banks, and ultimately, the value of paper money. In fact, the
ballooning size of the US Treasury‘s debt, which hit a record $12.8-trillion last
month, has been a steady linchpin supporting the historic rally in the gold
market over the past decade.
As a general rule of thumb, every $1-trillion of fresh debt issued by the
Treasury equates with a $125 /ounce increase in the price of gold, regardless
of how the Fed is manipulating the federal funds rate or bond yields. As long
as the Fed and G-20 central banks continue to peg ultra-low interest rates, and G-20 governments continue to flood the debt markets with huge
quantities of IOU‘s, - it translates into monetization, and the trajectory for the
gold market would stay bullish.
Situated in a sweet spot, alongside booming global stock markets, and
soaring prices for base metals, are the mining companies listed on the
Australian Stock Exchange. Carry traders are borrowing Japanese yen, and
gaining exposure to the higher yielding Australian dollar, by speculating in
Australian mining and natural resources shares. Also fueling the Aussie
dollar‘s gains from 77-yen in early February to 87-yen this week are high and
rising Australian interest rates, and a surge in the spot price for iron ore,
which hit $167 /ton, led by frantic Chinese steelmakers.
Recently, Vale, the Brazilian mining giant, said it negotiated a whopping 90%
increase in the contract price for iron-ore, with one of its key Asian
customers, Sumitomo Metal, Japan‘s third-biggest steelmaker. Australian
miners BHP Billiton and Rio Tinto quickly re-negotiated the terms of their iron
ore sales, and moved future sales to quarterly contracts, adding to volatility
on the spot market.
Global demand for iron-ore is expected to reach a record 1-billion tons this
year, boosting Australia‘s terms of trade, which is expected to rebound 15%
96
this year as higher iron ore and coal spot prices are built into new export
contract prices.Iron ore and coal account for nearly 40% of Australia’s
exports by value, and price increases for these two commodity
exports alone could add $21-billion to the local economy.
If Beijing allows the yuan to appreciate against the US-dollar, as expected, it
would cut the cost of China‘s imports of commodities, which totaled $244billion in 2009. Last year, China spent 607-billion yuan ($89-billion) on
importing crude oil, 343-billion yuan ($50-billion) on iron ore and
206-billion yuan ($30.2-billion) on copper. However, the Chinese ruling
elite are fearful, that any revaluation would backfire, by touching off a global
stampede of speculators into commodities.
Copyright © 2010 Gary Dorsch, SirChartsAlot, Inc.
Disclaimer, Bio, Subscription Information, & Editorial Archive
contact information
Gary Dorsch | Editor, Global Money Trends Magazine | Email | Website
97
98
Appendix H – Banking Cabal Gains from Financial Crises
and Wars
99
Appendix I – Syed Hoque’s Bio
From the age of 17 Syed has been interested in economic development,
engineering and history.
Since 1995 he has developed a keen interest in Islamic
prophecies (sayings of the Prophet (pbuh)) about the times and signs of the appearance
of Mehdi, Imposter Christ (Dajjal) and Jesus (alahis salaam), and finding connections in
them to global events that are unfolding in politics and finance. By the Grace of Allah
Almighty Syed was able to see this crisis coming since the summer of 2003 and has been
advising his family and friends to prepare for this eventuality.
Even being a US citizen, he took steps to remove himself and his children from
that debt-laden country, and immigrated to New Zealand in 2005 to avoid the social
unrest that will unfold in the US due to the economic disintegration arising from the
coming hyperinflation. This is no less a crisis than the German hyperinflation in the early
1920s which gave rise to fascism and Hitler.
Syed holds a B.S. degree in Mechanical Engineering from Columbia University
(US), a Master‘s degree in Mechanical Engineering from Texas A&M University (US), an
MBA in Finance from Columbia Business School (Columbia University, New York), and
pursuing a Ph.D. in Islamic Finance to understand the root causes of crises, and provide
remedies for these systemic crises from an Islam perspective.
Syed‘s professional career ranges from working as an Associate Consulting
Engineer on experimental helicopters at NASA‘s largest wind tunnel facilities in Mountain
View (California), to serving as a Sr. Financial Analyst at Hewlett-Packard Company
Headquartered in Palo Alto (California), to Sr. Consultant at KPMG Consulting at the
same location.
Lately, Syed has been engaged in Islamic Finance Training in
Foundations of Islamic Finance and MicroFinance with SHAPETM Financial Corporation
under the sponsorship of The RedMoney Group in Kuala Lumpur.
100